AN EXAMINATION OF THE EXTRAORDINARY

EFFORTS BY THE FEDERAL RESERVE BANK

TO PROVIDE LIQUIDITY IN THE
CURRENT FINANCIAL CRISIS

HEARING
BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION

FEBRUARY 10, 2009

Printed for the use of the Committee on Financial Services

Serial No. 1113

(
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48674 PDF

2009

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HOUSE COMMITTEE ON FINANCIAL SERVICES

BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania
MAXINE WATERS, California
CAROLYN B. MALONEY, New York
LUIS V. GUTIERREZ, Illinois
ZQUEZ, New York
NYDIA M. VELA
MELVIN L. WATT, North Carolina
GARY L. ACKERMAN, New York
BRAD SHERMAN, California
GREGORY W. MEEKS, New York
DENNIS MOORE, Kansas
MICHAEL E. CAPUANO, Massachusetts
N HINOJOSA, Texas
RUBE
WM. LACY CLAY, Missouri
CAROLYN MCCARTHY, New York
JOE BACA, California
STEPHEN F. LYNCH, Massachusetts
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
AL GREEN, Texas
EMANUEL CLEAVER, Missouri
MELISSA L. BEAN, Illinois
GWEN MOORE, Wisconsin
PAUL W. HODES, New Hampshire
KEITH ELLISON, Minnesota
RON KLEIN, Florida
CHARLES A. WILSON, Ohio
ED PERLMUTTER, Colorado
JOE DONNELLY, Indiana
BILL FOSTER, Illinois
CARSON, Indiana
ANDRE
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware
PETER T. KING, New York
EDWARD R. ROYCE, California
FRANK D. LUCAS, Oklahoma
RON PAUL, Texas
DONALD A. MANZULLO, Illinois
WALTER B. JONES, JR., North Carolina
JUDY BIGGERT, Illinois
GARY G. MILLER, California
SHELLEY MOORE CAPITO, West Virginia
JEB HENSARLING, Texas
SCOTT GARRETT, New Jersey
J. GRESHAM BARRETT, South Carolina
JIM GERLACH, Pennsylvania
RANDY NEUGEBAUER, Texas
TOM PRICE, Georgia
PATRICK T. MCHENRY, North Carolina
JOHN CAMPBELL, California
ADAM PUTNAM, Florida
MICHELE BACHMANN, Minnesota
KENNY MARCHANT, Texas
THADDEUS G. McCOTTER, Michigan
KEVIN McCARTHY, California
BILL POSEY, Florida
LYNN JENKINS, Kansas
CHRISTOPHER LEE, New York
ERIK PAULSEN, Minnesota
LEONARD LANCE, New Jersey

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel

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CONTENTS
Page

Hearing held on:

February 10, 2009 ............................................................................................
Appendix:
February 10, 2009 ............................................................................................

1
61

WITNESSES
TUESDAY, FEBRUARY 10, 2009
Bernanke, Hon. Ben S., Chairman, Board of Governors of the Federal Reserve
System ...................................................................................................................

APPENDIX
Prepared statements:
Bachmann, Hon. Michele .................................................................................
Price, Hon. Tom ................................................................................................
Watt, Hon. Melvin ............................................................................................
Bernanke, Hon. Ben S. .....................................................................................
ADDITIONAL MATERIAL SUBMITTED

FOR THE

RECORD

Kanjorski, Hon. Paul E.:

Joint statement of various undersigned groups .............................................
Written statement of the National Association of Realtors ..........................
Moore, Hon. Dennis:
Insert relating to the Limit Executive Compensation Abuse Act .................
Bernanke, Hon. Ben S.:
Written responses to questions submitted by Hon. J. Gresham Barrett .....
Written responses to questions submitted by Hon. Bill Foster ....................
Written responses to questions submitted by Hon. Gary Peters ..................
NAFCU:
Written statement of the National Association of Federal Credit Unions ..

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AN EXAMINATION OF THE EXTRAORDINARY

EFFORTS BY THE FEDERAL RESERVE BANK
TO PROVIDE LIQUIDITY IN THE
CURRENT FINANCIAL CRISIS
Tuesday, February 10, 2009

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The committee met, pursuant to notice, at 1:01 p.m., in room
2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Maloney, Watt, Sherman, Meeks, Moore of Kansas, Capuano, Hinojosa, Clay, Baca, Lynch, Miller of North Carolina, Scott, Green,
Cleaver, Bean, Moore of Wisconsin, Hodes, Ellison, Wilson, Perlmutter, Donnelly, Foster, Carson, Speier, Minnick, Adler, Kilroy,
Driehaus, Himes, Peters, Maffei; Bachus, Castle, Royce, Lucas,
Paul, Manzullo, Jones, Biggert, Capito, Hensarling, Garrett, Barrett, Neugebauer, Price, McHenry, Marchant, McCotter, McCarthy
of California, Posey, Jenkins, Lee, and Paulsen.
The CHAIRMAN. The hearing will come to order.
This is a very important hearing because it will begin the public
discussion of the extraordinary powers granted to the Federal Reserve by a statute passed in the depths of the depression 6077
years ago, which had not been used very much. As the Chairman
of the Federal Reserve points out in his statement, it was not much
used, and maybe not at all from the 1930s to recently. And I will
tell you, I was surprised myself to learn about it, having been on
this committee for some time, and having been chairman since January of 2007.
In September of 2008, what we were aware of is, first, under the
Bear Stearns case, $29 billion seemed like a lot of money for the
Federal Reserve to have at its disposal; those were the good old
days. In September, the Chairman of the Federal Reserve, accompanied by the Secretary of the Treasury, Mr. Paulson, asked to
meet with the congressional leadership, myself, the gentleman from
Alabama, Mr. Bachus, and our Senate committee counterparts.
And we were told that it was the intention of the Federal Reserve,
with the full support of the Administration, to make $80 billion
available for the insurance company AIG.
I remember at the time saying to the Chairman, Do you have
$80 billion? And his answer was, Well, we have $800 billion.
And that is when many of us for the first time understood the full
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2
scope of this statute. I say that because there have been some questions raised about how did this happen and what has been the public discussion. People should understand that almost all of this
money, I guess Bear Stearns began it, but almost all of this money
that has been made available under this authority from the 1932
statute dates from late September to October. So much of the time,
of course, is when we were out of session.
Now that we are back in session, it did seem to me, and I have
talked to my colleagues on the Republican side, that it was important to begin a public discussion of this from several angles. First
of all, there was a great deal of interest in how the Federal Reserve
has used that authority, how much money has been deployed, what
are the criteria, to what extent are taxpayers at of risk for losing
money here. It is an ongoing effort.
I read just before coming here the Secretary of Treasury, the new
Secretary of the Treasurys announcement of his plans to use the
TARP funds. It is very clear that the Obama Administration, as did
the Bush Administration, is using the money in the TARP program
in conjunction with the lending authority of the Federal Reserve.
That is, the TARP money is going further than it otherwise might
because the Federal Reserve has its capacity to lend very much involved.
So we have the questions of how things have been deployed and
what the plans are for the future. There are also some important
questions involving the way in which we govern ourselves. The
Chairman of the Federal Reserve, indeed, the Federal Reserve system, I believe was responding to very real needs in this society,
and people need not agree with every specific decision that the Federal Reserve made, it seems to me, to appreciate the sense of very
important public purpose that has motivated them. This has all
been done in the interest of avoiding further damage to the economy and a credit collapse.
We are now still dealing with that crisis. And I am myself opposed to doing things that might hinder our ability to continue to
cope. Going forward though, it does not seem to me healthy in our
democracy for the amount of power that is lodged in the Federal
Reserve with very few restrictions to continue. And I say that in
no way meaning to criticize the Federal Reserve. Nobody currently
in the Federal Reserve was there when they passed the 1932 statute. The responses of the Federal Reserve, I believe, have been motivated by a desire to stem further bumps in the economy. I think
much of what they have done has been useful. I think the authority
has been very responsibly wielded. And in the midst of crisis, we
would not, I think, be wise to revise it.
But going forward, the allocation of responsibilities between
Treasury and the Federal Reserve is a very important one. And the
question of how, in a self-governing society, you allocate these responsibilities is important.
There are some who have saidincluding the Heritage Foundationa while ago that they liked the fact that the Federal Reserve
had this authority rather than the TARP, precisely because the
Federal Reserve was so much more insulated from public opinion,
and from electoral processes. I understand the desire that some
have to diminish the electoral intervention, but ultimately in a de-

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3
mocracy that is not, I think, an appropriate way to go. Certainly
not with this degree of power.
So those are the questions we will be discussing not just today,
but on into the future. The gentleman from Alabama.
Mr. BACHUS. Thank you, Mr. Chairman. And welcome, Chairman
Bernanke.
When historians look back at the financial crisis and the ensuing
economic evil of the last half of the first decade of the 21st Century, what will be the story line? I submit it will be that while the
public was focused on the tax rebate program, then on the $700 billion TARP, and finally on the $100 trillion economic stimulus package, a much larger drama was unfolding below the surface. While
the public was distracted and focused on these high-profile activities and events, other programs and activities, some 5 times larger
than those debated and discussed in open forums, were being enacted by a select few unelected Federal regulators who were making commitments of trillions of dollars backed by taxpayer guarantees and loans. Perhaps much like the analogy of an iceberg, only
the tip of which is visible, the public, and we as elected representatives, are left merely to speculate as to the exact nature and composition of these complex financial transactions, which have been
made and entered into out of public view.
By using an obscure and seldom utilized provision of the Federal
Reserve Act of 1913, the Federal Reserve, with Treasurys cooperation, has made unprecedented interventions into the financial markets. Not only has there been no disclosure or little oversight or accountability, there has actually been an active resistance on the
part of these agencies to explain their actions or disclose the terms.
At this time, because we know almost nothing about these transactions, we can only guess as to their ultimate success or failure.
In future years, I am sure those who write of these days will be
intrigued and captivated by the question, how could such an unprecedented action have occurred without the consent of the government? In many of these transactions that have been undertaken
so far, we have been told we could not be given the specifics or details or terms because it was proprietary information of the companies involved. We have been left to guess as to the terms, the conditions, the size in many cases, the results expected, the consequences, the criteria for eligibility, or even the identity of all the
parties. What is unknown pales in comparison to what we know.
Perhaps of all the troubling aspects of these what I will call iceberg transactions, I am most troubled by what appears above the
surface to be a total lack of guiding principles in entering these
agreements and arrangements. This perception is only heightened
by a series of ad hoc decisions and seeming policy reversals which
gives an indication that there is, in fact, no detailed plan to navigate us through what we all agree are troubling times.
Let me close by suggesting a missing but essential guiding principle. I believe in a democracy it should be a requirement in any
agreement or transaction involving the government. The principle
is simple: In the event that our governing officials come to the conclusion that a commitment of public funds is necessary, if a commitment of taxpayer funds or guarantees cannot be disclosed be-

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4
cause of the circumstances involved, it cannot and should not be
made.
If a private party to a transaction not involving national security
is unwilling to enter into an agreement open to public scrutiny and
examination, the agreement should not be made. Thank you, Mr.
Bernanke, and thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from North Carolina is recognized for 3 minutes.
Mr. WATT. Thank you, Mr. Chairman. Using the authority of unusual and exigent circumstances under section 13(3) of the Federal
Reserve Act, the Fed has set up emergency lending facilities to address severe market strains and commercial paper by activating a
commercial paper funding facility to address severe strains related
to money market funds by activating a money market liquidity facility and announced earlier today that it plans a substantial expansion of this term asset-backed security loan facility.
The use of each of these tools will, of course, expand the balance
sheet of the Federal Reserve and subject the Fed to more attention,
scrutiny, second guessing, and oversight, otherwise as the chairman has indicated we run the risk that the authority granted in
the 1933 statute could be out of control or subject to abuse. The
use of each of these tools also raises the question, what happens
when the unusual and exigent circumstances are over? What is the
exit strategy for winding down the various Fed lending programs
when we return to normal economic times?
Todays review of the Feds power under section 13(3) of the Federal Reserve Act is the first in a series of hearings and other actions that we must take to evaluate steps that certainly appear to
be necessary to combat the current economic crisis that confronts
us.
I trust that our evaluation will be transparent, open, and fair,
and I certainly welcome Chairman Bernankes testimony. I yield
back.
The CHAIRMAN. The gentleman from Texas, Mr. Paul, for 3 minutes.
Dr. PAUL. Thank you, Mr. Chairman. I want to thank you for
calling this hearing because the issue of transparency of the Federal Reserve System is something that is of crucial value to us. I
rather enjoy the fact that the Federal Reserve has been in the
limelight lately because that is the source of our problems, that is
where the inflation comes from, and that is where the distortion
comes from and that is where the malinvestment comes from, and
it is a shame we do not know more about it. But I dont blame the
Chairman of the Federal Reserve System for this, because it has
already been quoted that 13(3) is in the law. So a lot of responsibility falls on us here in the Congress.
Also in Title 13, chapter 7 of subtitle 1, it says that the GAO has
authority to audit the Federal Reserve Board, the Federal Reserve
banks as well as the FDIC and the Comptroller of the Currency.
It sounds good, except you go to the next paragraph and it says,
except for you cant audit the Federal Reserve or any of these organizations for the things that matter, such as transactions with foreign banks, transactions with foreign governments, transactions
with international banking organizations. We cant have real access

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to knowing what is happening at the discount window in detail as
well as how reserves are used, as well as information in what really transpires at the FOMC.
The fact that we have information dribbling out to us, that is one
thing, but for instance, in the last about 2 years, we have been denied the information that a lot of people consider rather important,
and that is the total money supply. What is M3 doing? That for
some of us, we think that is important. But it indicates that transparency is not always the goal.
The question we in the Congress have to ask is, why is it the
Congress is so eager to give up their prerogatives and their responsibilities, whether it is foreign policy, or whether it is giving the
Executive Branch the authority to go to war without the Congress
saying much, or whether it is turning over the monetary system to
somebody so they can operate essentially in secrecy and deal not
with a few hundred billion dollars, like $800 billion, but tens of
trillions of dollars when it adds up. And yet the Congress seems
to do very little.
So if we are concerned about transparency, if we are concerned
about what is happening with monetary policy, believe me, the code
has to be changed. But I am delighted that the chairman of the
Banking Committee is interested in this at least to put some pressure and we do get bits and pieces and dribbles of information. But
as to why we turned over this tremendous power to actually run
the economy, central economic planning through the manipulation
of prices, the whole problem we are facing today is that the Treasury and the Congress and the Federal Reserve are trying to price
things they are incapable of pricing. That is the toxic assets. The
illiquid assets. So if we only allow the market to operate, we might
clean up the mess we have brought upon ourselves.
Mr. KANJORSKI. [presiding] Thank you very much. Now, Chairman Bernanke, if you will be kind enough to give your presentation
to the committee.
STATEMENT OF THE HONORABLE BEN BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE
SYSTEM

Mr. BERNANKE. Thank you. Chairman Frank, Ranking Member

Bachus, and other members of the committee, I appreciate this opportunity to provide a brief review of the Federal Reserves various
credit programs, including those relying on our emergency authorities under 13(3) of the Federal Reserve Act. I will also discuss the
Federal Reserves ongoing efforts to inform the Congress and the
public about these activities.
As you know, the past 18 months or so have been extraordinarily
challenging for policymakers around the globe, not least for central
banks. The Federal Reserve has responded forcefully to the financial and economic crisis since its emergence in the summer of 2007.
Monetary policy has been especially proactive. The Federal Open
Market Committee began to ease monetary policy in September
2007 and continues to ease in response to a weakening economic
outlook.
In December 2008, the committee set a range of zero to 25 basis
points for the target Federal funds rate. Although the target for the

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Federal Reserve rate is at its effective floor, the Federal Reserve
has employed at least three types of additional tools to improve the
functioning of credit markets, ease financial conditions, and support economic activity. The first set of tools is closely tied to the
central banks traditional role of providing short-term liquidity to
sound financial institutions.
Over the course of the crisis, the Fed has taken a number of extraordinary actions, including the creation of a number of new facilities for auctioning short-term credit to ensure that financial institutions have adequate access to liquidity.
In fulfilling its traditional lending function the Federal Reserve
enhances the stability of our financial system, increases the willingness of financial institutions to extend credit, and helps to ease
conditions in interbank lending markets, reducing the overall cost
of capital to banks.
In addition, some interest rates, including the rates on some adjustable rate mortgages, are tied contractually to key interbank
rates, such as the London Interbank Offered Rate or LIBOR.
To the extent that the provision of ample liquidity to banks reduces LIBOR, other borrowers will also see their payments decline.
Because interbank markets are global in scope, the Federal Reserve has approved bilateral currency liquidity agreements with 14
foreign central banks. These so-called swap facilities have allowed
these central banks to acquire dollars from the Federal Reserve
that the foreign central banks may lend to financial institutions in
their jurisdictions. The purpose of those liquidity swaps is to ease
conditions in dollar funding markets globally. Improvements in
global interbank markets in turn create greater stability in other
markets at home and abroad such as money markets and foreign
exchange markets.
The provision of short-term credit to financial institutions exposes the Federal Reserve to minimal credit risk, as the loans we
make to financial institutions are generally short-term,
overcollateralized, and made with recourse to the borrowing firm.
In the case of the currency swaps, the foreign central banks are responsible for repaying the Federal Reserve, not the financial institutions that ultimately receive the fund. And the Fed receives an
equivalent amount of foreign currency in exchange for the dollars
that it provides to the foreign central banks.
Although the provision of ample liquidity by the central bank to
financial institutions is a time-tested approach to reducing financial strains, it is no panacea. Today, concerns about capital, asset
quality, and credit risk continue to limit the willingness of many
intermediaries to extend credit, notwithstanding the access of these
firms of central bank liquidity.
Moreover, providing liquidity to financial institutions does not directly address instability or declining credit availability in critical
non-bank markets such as the commercial paper market or the
market for asset-backed securities. To address these issues, the
Federal Reserve has developed a second set of policy tools which
involve the provision of liquidity directly to borrowers and investors
in key credit markets. For example, we have introduced facilities
to purchase highly-rated commercial paper at a term of 3 months
and to provide backup liquidity for money market mutual funds.

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7
In addition, the Federal Reserve and the Treasury have jointly
announced a facility expected to be operational shortly that will
lend against AAA rated asset-backed securities, collateralized by
recently originated student loans, auto loans, credit card loans, and
loans guaranteed by the Small Business Association. Unlike our
other lending facilities, this one combines Federal Reserve liquidity
with capital provided by the Treasury. If the programs works as
planned, it should help to restart activity in these key
securitization markets and lead to lower borrowing rates and improved access in the markets for consumer and small business
credit.
This basic framework could also expand to accommodate higher
volumes as well as additional classes of securities as circumstances
warrant, and Secretary Geithner alluded to that possibility this
morning.
These special lending programs have been set up to minimize
credit risk to the Federal Reserve. The largest program, the commercial paper funding facility, accepts only the highest rated paper.
It also charges borrowers a premium which is set aside against
possible losses. As just noted, the facility that will lend against securities backed by consumer and small business loans is a joint
Federal Reserve Treasury program. Capital provided by the Treasury from the Troubled Asset Relief Program will help insulate the
Federal Reserve from credit losses and the Treasury will receive
most of the upside from these loans.
The Federal Reserves third set of policy tools for supporting the
functioning of credit markets involves the purchase of a longer
term securities for the Feds portfolio. For example, we have recently announced plans to purchase up to $100 billion of the debt
of the Government-Sponsored Enterprises, which include Fannie
Mae, Freddie Mac, and the Federal Home Loan Banks, and $500
billion in agency-guaranteed mortgage-backed securities by midyear. The objective of these purchases is to lower mortgage rates,
thereby supporting housing activity in the broader economy.
The Federal Reserve is engaged in an ongoing assessment of the
effectiveness of its credit. Measuring the impact of our programs is
complicated by the fact that multiple factors affect market conditions. Nevertheless, we have been encouraged by the response to
these programs, including the reports and evaluations offered by
market participants and analysts. Notably, our lending to financial
institutions, together with actions taken by other agencies, has
helped to relax the severe liquidity strains experienced by many
firms and has been associated with considerable improvements in
interbank lending markets.
For example, we believe that the aggressive liquidity provision by
the Fed and other central banks has contributed to the recent declines in LIBOR and is a principal reason that liquidity pressures
around the end of the year, often a period of heightened liquidity
strains, were relatively modest.
There is widespread agreement that our commercial paper funding facility has helped to stabilize the commercial paper market,
lowering rates significantly and allowing firms access to financing
at terms longer than a few days. Together with other government
programs, our actions to stabilize the money market mutual fund

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8
industry have shown some measure of success, as the sharp withdrawals from funds seen in September have given way to modest
inflows.
Our purchases of agency debt at MBS seem to have had a significant effect on conforming mortgage rates, with rates of 30-year
fixed rate mortgages falling close to a percentage point since the
announcement of our program.
All of these improvements have occurred over a period in which
the economic news has generally been worse than expected and
conditions in many financial markets, including the equity markets, have worsened.
We evaluate existing and perspective programs based on the answers to three questions: First has normal functioning in the credit
markets been severely disrupted by the crisis? Second, does the
Federal Reserve have tools that are likely to lead to a significant
improvement in function and credit availability in that market?
And are the Federal Reserve tools the most effective methods either alone or in combination with other agencies to address the disruption? And third, do improved conditions in the particular market have the potential to make a significant difference for the overall economy?
To illustrate, our purchases of agency debt and MBS meet all
three criteria. The mortgage market is significantly impaired, the
Feds authority to purchase agency securities gives us the straightforward tool to try to reduce the extent of that impairment. And
the health of the housing market bears directly and importantly on
the performance of the broader economy.
Section 13(3) of the Federal Reserve Act authorized the Federal
Reserve Board to make secured loans to individuals, partnerships
or corporations, in unusual and exigent circumstances, and when
the borrower is, unable to secure adequate credit accommodations
from other banking institutions. This authority added to the Federal Reserve Act of 1932 was intended to give the Federal Reserve
the flexibility to respond to emergency conditions. Prior to 2008,
credit had not been extended under this authority since the 1930s.
However responding to the extraordinary stressed conditions in financial markets the Board has used this authority on a number of
occasions over the past year.
Following the Bear Stearns episode in March 2008, the Federal
Reserve Board invoked section 13(3) to make primary securities
dealers, as well as banks, eligible to borrow on a short-term basis
from the Fed. This decision was taken in support of financial stability during a period in which the investment banks and other
dealers faced intense liquidity pressures.
The Fed has also made use of the section 13(3) authority in its
programs to support the functioning of key credit markets, including the commercial paper market and the market for asset-backed
securities. In my view, the use of section 13(3) in these contexts is
well-justified in light of the breakdowns of these critical markets
and the serious implications of those breakdowns for the health of
the broader economy.
As financial conditions improve, and circumstances are no longer
unusual and exigent, the programs authorized under section 13(3)
will be wound down as required by law. Other components of the

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Federal Reserves credit programs, including our lending to depository institutions, liquidity swaps with other central banks, and purchases of agencies and securities make no use of the powers conferred by section 13(3).
In a distinct set of activities, the Federal Reserve has also used
the 13(3) authority to support government efforts to stabilize systemically critical financial institutions. The Federal Reserve collaborated with the Treasury to facilitate the acquisition of Bear
Stearns by JPMorgan Chase & Company, and to prevent a failure
of the American International Group or AIG. And we worked closely with the Treasury and the Federal Deposit Insurance Corporation to help stabilize Citigroup and Bank of America. In the cases
of Bear Stearns and AIG, as part of a strategy to avoid impending
defaults by the companies, the Federal Reserve made loans against
polls of collateral.
Activities to stabilize systemically important institutions seem to
me to be quite different in character from the use of section 13(3)
authority to support the repair of credit markets. The actions that
the Federal Reserve and the Treasury have taken to stabilize systemically critical firms were essential to protect the financial system as a whole. And in particular the financial risks inherent in
the credit extended by the Federal Reserve were, in my view,
greatly outweighed by the risk that would have been faced by the
financial system and the economy had we not stepped in.
However, many of these actions might not have been necessary
in the first place had there been in place a comprehensive resolution regime aimed at avoiding disorderly failure of systemically
critical financial institutions. The Federal Reserve believes that the
development of a robust resolution regime should be a top legislative priority. If specification of this regime were to include clear expectations of the Federal Reserves role in stabilizing or resolving
systemically important firms, a step we very much support, then
the contingencies in which the Fed might need to invoke emergency
authorities could be tightly circumscribed.
I would like to conclude by discussing the Federal Reserves ongoing efforts to inform the Congress and the public about its various lending programs.
I firmly believe that central banks should be as transparent as
possible, both for reasons of democratic accountability and because
many of our policies are likely to be more effective if they are well
understood by the markets and the public. During my time at the
Federal Reserve, the FOMC has taken important steps to increase
the transparency of monetary policy, such as moving up the publication of the minutes of policy meetings, and adopting the practice
of providing longer-term projections of the evolution of the economy
on a quarterly basis.
Likewise, the Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and its
balance sheet. For example, we continue to add to the information
shown in the Feds H.4.1 release, which provides weekly detail on
the balance sheet and the amounts outstanding for each of the Federal Reserves lending facilities. Extensive additional information
about each of the Federal Reserves lending programs is available
online, as shown in the appendix to this testimony.

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Pursuant to a requirement included in the Emergency Economic
Stabilization Act passed in October, the Fed also provides monthly
reports to the Congress on each of its programs that rely on the
section 13(3) authorities.
Generally the Feds disclosure policies are consistent with the
current best practices of major central banks around the world.
With that said, recent developments have understandably led to a
substantial increase in the publics interest in the Feds balance
sheet and programs. For this reason we at the Fed have begun a
thorough review of our disclosure policies and the effectiveness of
our communication.
Today I would like to mention two initiatives. First, to improve
public access to information concerning Fed policies and programs,
Federal Reserve staff are developing a new Web site that will bring
together in a systematic and comprehensive way the full range of
information that the Federal Reserve already makes available, supplemented by new explanations, discussions and analyses. Our goal
is to have this Web site operational within a few weeks.
Second, at my request, Board Vice Chairman Donald Kohn has
agreed to lead a committee that will review our current publications and disclosure policies relating to the Feds balance sheet and
lending policies. The presumption of the committee will be that the
public has a right to know, and that the nondisclosure of information must be affirmatively justified by clearly articulated criteria
for confidentiality based on factors such as reasonable claims to
privacy, the confidentiality of supervisory information, and the effectiveness of policy.
Thank you. I will be pleased to respond to your questions.
[The prepared statement of Chairman Bernanke can be found on
page 67 of the appendix.]
The CHAIRMAN. Thank you, Mr. Chairman. I apologize, but there
were multiple things going on, so I had to leave.
The first point I want to makeand I appreciate your talking
about opennessis that one of the things that we do too little of,
I believe, in our politics, in our government, is when people predict
disaster, we dont go back and see whether or not the disaster occurred. And sometimes that can be helpful.
When Henry Gonzalez was the chairman of this committee, Mr.
Greenspan was the head of the Federal Reserve, probably even before. I think he may have taken over when Mr. Volcker was Chairman. He pushed hard for more openness. Back then, in the 1980s,
the results of the Federal Open Market Committee (FOMC) werent
published, I believe, until the next Open Market Committee. People
had to guess how the Committee voted. The question of the minutes came up. The first response, sadly, of the Federal Reserve
Chairman was to deny that there were minutes, then later they
were found in a drawer and made public.
There were serious arguments made that the kind of openness
that Henry Gonzalez was pushing for would undermine the conduct
of monetary policy. Despite that, he was able to persuade the Fed
to make these changes, probably out of fear that if they didnt do
that, there would have been legislation which would have been,
from their standpoint, a hardship, and zero negatives have resulted. In fact, I think you are better off today. I dont know what

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you think, but if we were still in a period where the FOMC voted,
and people didnt know how they voted, the uncertainty and the
ability that you have to influence the markets would have been
greatly attenuated.
We had a previous hearing at which one of our colleagues, the
gentleman from Florida, Mr. Grayson, asked Mr. Kohn, who I
thought was an excellent witness, forthcoming, thoughtfulI congratulate Mr. Kohn on his performance as a witness in being constructive. But he said that he couldnt give information about who
the recipients were. I hope in this study of openness that it will be
completed quickly and that you will put a very severe test against
these claims. Historic experience is that there was a tendency to
claim damage when there isnt any.
Next, you know, we are in a very difficult political situation. We
have this problem. We will talk about it again tomorrow. It is essential that we reinvigorate the credit system. We do not have the
option of creating a whole new credit system. That means we have
to work with the existing one. The problem is that there are a lot
of people who are very angry at the people who are running the
credit system, and we will have to do things that look like they are
helping them or may be helping them, because there is no way to
reinvigorate the system without that. But that creates a political
climate where we have to be very, very careful.
Let me ask one of the important questions you touch on here,
and that is the fear that you are insufficiently collateralized. The
fear ranges from some people who believe that, given the deterioration of assets, with the best will in the world, it would be hard for
you to be assured of that. There are others who think less highly
of you than I do, who believe that this is some plot to enrich some
bad people, but you are deliberately taking less collateral than you
should. There are a whole range of opinions in between.
Please elaborate. You talk about this. We have had some experience with Bear Stearns, and the AIG experience does not appear
to be as hopeful as some have thought, but what has been the experience to date with the collateral, and how much assurance can
you give the American public that however much the money is,
whatever the total is, you will be asked about that, how much of
it is at risk, what loss can we reasonably expect to suffer?
Mr. BERNANKE. I thank you, Mr. Chairman.
I would like to maintain throughout this hearing a very clear distinction between the 95 percent of our balance sheet which is devoted to regular lending programs, such as lending to sound financial institutions or supporting the credit commercial paper facility,
versus the other 5 percent of our balance sheet which has been involved in
The CHAIRMAN. Fair point, but quantify those. How much does
the 5 percent amount to?
Mr. BERNANKE. I will. The 5 percent, about $100 billion, is commitments that have been undertaken in government efforts to prevent the failure of major financial institutions. I want to make that
distinction. The 95 percent, the bulk of our lending, those programs
are extremely safe. They are overcollateralized. I could go through
each one, I did in my remarks, and explain why each one is safe,
mostly very short term, and very constructive.

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The CHAIRMAN. And that would be about $1.9 trillion?
Mr. BERNANKE. That would be at $1.9 trillion, yes. That is correct. The other $100 billion, which is related to Bear Stearns and
AIG operations, is a bit less secure, although our anticipation is
that we will not lose money on those extensions.
The CHAIRMAN. my time has expired. Let me just say that I
think that is an important point, and I know you will be asked to
get back to us.
What you are saying is that people who extrapolate from the
Bear Stearns and AIG experience to the rest of your holdings; that
is too pessimistic. I think that is a very important point that you
will have to establish to people. The most public ones are Bear
Stearns and AIG, and I think that is part of it, that people do not
see those as safe. And then you are going to have to make clear
that distinction you just made.
Mr. BERNANKE. Thank you.
If I may, just very briefly, we engaged in those AIG and Bear
Stearns transactions with great reluctance, because there is no existing structure to resolve systemically critical nonbanking institutions. If Congress would provide such a structure, the Federal Reserve would be more than delighted to step aside from such operations.
The CHAIRMAN. That is a very important point.
The gentleman from Alabama.
Mr. BACHUS. Mr. Chairman, in my opening statement I said that
we should not enter into arrangements with financial institutions
if the terms and conditions of those agreements cannot be fully disclosed. Would you like to react to that?
Mr. BERNANKE. Yes, sir. The terms and conditions, to my knowledgeand if you have any exceptions, I would be glad to get information to youbut the terms and conditions of all our agreements,
to my knowledge, are fully disclosed. There are two types. There
are the lending programs, such as the discount window and commercial paper facility. Those are all public information and all on
the Web site. The testimony has a list of 5 pages of Web sites
where information can be obtained. That information is fully disclosed. The one-off deals associated with AIG and Bear Stearns
likewise, to my knowledge, they are fully disclosed in terms of
Mr. BACHUS. Are the assets and the prices paid, the valuations,
are those disclosed?
Mr. BERNANKE. The categories of securities and loans are disclosed and the valuation.
Mr. BACHUS. By categories
Mr. BERNANKE. Well, one agency MBS is very much like another
agency MBS, sir. The only distinct assets in the Bear Stearns portfolio which are not securities are individual loans to companies and
so on, and those companies didnt ask to be in this portfolio, so we
dont want to cast aspersions on them because they happen to be
captured in that operation. But if your staff would like more detailed information, we can arrange to have that information provided. We provide quarterly information, we require monthly information on the evolution of the portfolio and of the arrangements,
and we provide quarterly fair value accounting the same way
banks have to do about the valuations of the portfolios.

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Mr. BACHUS. You have talked about stabilized, systemically critical institutions. What is the criteria between an institution that is
systemically critical and one that is not? I mean, what I have said,
you know, you have too big to fail, which implies too small to save.
To me that doesnt seem to be a fair criteria.
Mr. BERNANKE. Well, Congressman, you have two different questions there. The first is what are the criteria for systemically critical. And in each of the cases we have confronted, we have looked
very carefully not only at the size and complexity of the firm in
question, but also at the types of markets, counterparties and other
transactions it was involved in, and tried to extrapolate if this firm
failed, if it defaulted in the morning, how big would the implications be for the entire financial system and for the economy. And
those cases where the risks for the broad system are just too great
to take, we have to take whatever measures possible to try to prevent the failure.
Your second point that it is not fair, I agree 100 percent. If I was
a small banker, I would be very upset. Small bankers dont have
this protection. The too big to fail problem is a serious, serious
problem, and it should be a top priority to greatly reduce this problem as we go forward with restructuring the financial system.
Mr. BACHUS. And one way to do that would be simply not to permit a corporation of that size; is that right?
Mr. BERNANKE. That would be one strategy, but other strategies
include tougher regulation and supervision, or, as I have mentioned
before, having a tough resolution regime like the prompt corrective
action regime already in place for banks that would allow the government to come in at a stage before a default and resolve the company in a safe and sound manner.
Mr. BACHUS. Let me ask you this: There have been numerous reports recently that you have hired Wall Street firms to help you
value and price assets. So in many cases those are the same firms
that have relationships and business associations, as well as personal relationships, with the very firms that they are negotiating
with.
Do you disclose the identities of, say, the negotiating teams? How
do you deal with conflicts of interest? And how much disclosure is
there?
Mr. BERNANKE. Well, except for the Bear Stearns case where we
had only a few hours to operate, we have done, generally speaking,
an RFP-type process where we accept bids and try to make sure
that the usual firewalls are in place.
It is probably impossible to completely separate these firms from
the other organizations in some sense, but these firms are specialists, and they provide services in evaluating those difficult-to-value
assets. And there are a number of them that we have relied on at
different times to help us provide expertise that we dont have inhouse.
Mr. BACHUS. Do you disclose the existence of actually who is on
each transaction, who these consultants were?
Mr. BERNANKE. Who was involved? Well, typically it would be
for example, in the case of New York Fed, it would have been the
president of the New York Fed and the chief counsel, the chief
legal counsel.

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Mr. BACHUS. No, I am talking about the private parties that they
get to help them evaluate the deals.
Mr. BERNANKE. Yes. Well, certainly everyone knows who the
principals and the leading players are in those firms. We can certainly ask if more information is needed. But these companies, of
course, have to establish credibly that they do have separations between their different activities, otherwise nobody would use them
because of concerns about conflict of interest.
Mr. BACHUS. Thank you.
The CHAIRMAN. The gentleman from Pennsylvania.
Mr. KANJORSKI. Thank you, Mr. Chairman.
Mr. Chairman, thank you for coming up here. I think already,
while listening to your opening remarks and some of the questions
proposed by the Members thus far, it becomes very clear that we
dont all have a very clear understanding of what has been carried
out over the last several months. I am going to put it in perspective
of myself.
I became acutely involved in this situation as of about September
15th, as you may know, and we have been working on various
pieces of legislation, obtaining various information. Under the prior
Administration, I thought that both the Secretary of the Treasury
and the President, quite frankly, were less than able to really spell
out what some of the problems were, and I recognize that as shortcomings of the Administration. But since that time, the new Administration has taken office, and the other night at dinner, I listened intently to the President describe what his actions would be
and what he wanted to do. And then I realized why so many of my
constituents and so much of the news media, regardless whether
it is specialized in financial affairs or the general news media,
seems to be talking about questions that are not sufficiently clear
as to what the problem is. And I realized last night when we were
briefed by Treasury as to what the Secretary of the Treasurys
statements would be today that it was represented by one of the
staffers who sat in the back of the room after the briefing was concluded and it was open for question and answers, and his question
was a very pertinent one: What is the plan, and what is the problem?
I think he succinctly put it, and maybe I would like to reiterate
what he said. I think all of you, you, sir, from the Federal Reserve,
to the Secretary of the Treasury past, to the present Secretary of
the Treasury, to our two Presidents, the present President and the
past President, have failed for all of us, particularly the general
public, to enunciate what the problem is. And it is very clear when
we listen to the debates of the various parties and the interest
groups that they are talking past each other, not to the problem.
What I am really raising, the question is what can we do, what
can you do, what can the key players do to take the time to define,
in as simple terms as possible, what is the problem, what are the
potential end results of the problem if not handled in a correct way
or are incapable of being handled, and where our glide path is
going?
I am really so sick and tired of listening to you and others saying, well, when we evolved this solution 4 weeks ago, the economy
has materially changed since then, and that is no longer operative.

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That is of little consequence or value to me as a policymaker or as
a legislator to know that all the work we put in for the last 4
weeks is useless because the circumstances changed.
Surely in describing the problem, I think the President described
it pretty simply the other night; he said we are in an accelerating
whirlpool. That makes sense to me. I understand what that means.
Why can we not simply say what that means if you take todays
circumstances and you extrapolate 4 weeks from now or 8 weeks
from now?
But more than that, you know, there was a question last night
at the Presidents news conference. One of the reporters asked, are
there going to be requirements for additional funds? I was a little
disappointed in our President, because I think he is a straight, upfront guy, but he sidestepped the question.
And the reality, unless I am terribly mistakenand maybe I
want to pose that question for you to answerI see no question
that more funds will be necessary on the side of stabilizing the financial institutions of this country. The $700 billion or the $350
billion we are working on right now is not going to be sufficient
enough to resolve this problem. And there is an attempt, as I sense
it, of Treasury and the Federal Reserve to find other conduits for
funds to be used or guarantees to be put in place that really do represent commitments in funds of the United States, but do not have
to be passed by Congress or openly declared. As a result, every
time that is heard, I think we lose the support of the American
people in understanding how serious this problem is and what the
end result could be if we dont get precipitous action, either today
on the recovery bill in the Senate or in our next bailout bills, TARP
2, or what you may call it, or going down the road as to what may
happen. What can we do to facilitate identifying and describing the
problem?
The CHAIRMAN. The gentlemans time has expired. The response
will have to come in writing.
The gentleman from Texas, Dr. Paul.
Dr. PAUL. Thank you, Mr. Chairman.
In my opening remarks, I mentioned that Title 31 gives the GAO
authority to audit the Fed, except in the final conclusion they exempt the Federal Reserve and the FDIC and the Comptroller of the
Currency, so there is no authority.
If Congress ever wants to know what is going on, we have to
change the U.S. Code. For instance, right now I think it would be
important for us to know what our monetary authorities are thinking about and talking about and planning internationally, because
this system isnt working, and the new system is going to be devised, and I am sure it has been discussed.
I would like it know if there are plans for another pseudoBretton Woods agreement. It is very, very important to us. It is important to our sovereignty and important to our wellbeing, but we
dont even have the right to know that as Members of Congress.
In section 13(3), it gives you the authority, and you cite the authority, to make loans and bail out individuals, partnerships, and
corporations. And it hasnt been used much, but it is there, and
that is congressional responsibility.

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But, you know, transparency is one thing, and I want that because it would expose the system as to how it operates, but there
is more to it than that. To me, it is the power, it is the power and
the authority that gravitates to the hands of a small group of people who can create money out of thin air. This is an ominous
power. It is the most powerful tool for central economic planning
around, and that really has to be the issue as much as transparency. Once you have this power to control money and credit and
centrally plan, you can distort contracts. So we are talking about
distorting contracts, rewriting contracts when we get involved in
these bailouts like we have been.
But you know, Chairman Bernanke, you have written a lot about
the Depression, and, of course, there was a famous quote that you
made once to Milton Friedman about apologizing about the Federal
Reserve bringing on and creating and prolonging the Depression,
but you assured him it wouldnt happen again. The free-market
people agree with you entirely; the Federal Reserve is responsible.
But the irony of all of this, and the key to this discussion has to
be, was it too much credit in the 1920s that created the conditions
that demanded a recession, Depression, or was it lack of credit in
the Depression that caused the prolongation? And that is the debate. Obviously, the free-market people say the Fed brought it on
by too much credit in the beginning.
But the question I have is the adjustment of real value of assets.
The Federal Reserve brings on these crises by interfering with the
cost of money and through interest rates and the supply of money,
but here we are working frantically to keep prices up. Housing
prices have to be up; we have to stimulate housing.
To me, from a free-market perspective, we are doing exactly the
opposite of what we should do. The prices of houses should drop.
We have 19 million unoccupied houses. Now, why should we in
Congress stimulate housing? What is so terribly wrong with the
market dictating this? We are frantic today. We are offering a new
$1.5 billion program to buy up toxic assets, and that is propping
up prices. That is illiquid, they are worthless; let us get rid of them
and get it over with, get the pain and suffering behind us. How
long are we going to be locked into this idea that we have to be
involved in this price fixing? What is wrong with allowing the market to allow these prices to adjust and go down quickly so we can
all go back to work again?
Mr. BERNANKE. Congressman, that was very interesting. Could I
respond to a couple of points you made?
First of all, in the Great Depression, Milton Friedmans view was
that the cause was the failure of the Federal Reserve to avoid excessively tight monetary policy in the early 1930s. That was Friedman and Schwartzs famous book. And with that lesson in mind,
the Federal Reserve has reacted very aggressively to cut interest
rates in this current crisis. And moreover, we have also tried to
avoid the collapse of the banking system, which was another reason for the Depression in the 1930s.
On the prices of housing and the like, we are not trying to prop
up the price of housing. What we are trying to do is get the credit
markets working again so that the free market can begin to func-

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tion in a normal way instead of a seized-up way in which it is currently acting.
And finally, on price fixing of so-called toxic or legacy assets, the
plan that Secretary Geithner described this morning would have as
an important component private asset managers making purchases
based on their own profit-maximizing analysis. So that would be
true market prices that would free up what is now a frozen market
to get transactions flowing again and should restore real price discovery to those markets.
Dr. PAUL. But so far, every one of these suggestions over the past
year was more money, more credit, more government involvement.
Nothing seems to be working. Even today, the markets werent
very happy with these announcements. I think the market is still
pretty powerful.
The CHAIRMAN. The gentlewoman from California, Ms. Waters.
Ms. WATERS. Thank you very much, Mr. Chairman.
I thank you, Mr. Bernanke, for being here today. And I suppose
I am in awe of the kind of power and flexibility that I have learned
that you have, particularly in the execution of section 13(3).
Let me just ask, because I dont really know how these discussions are made, I dont understand how they are made. You participated using your section 13(3) authority with Treasury, as you indicated, for the acquisition of Bear Stearns by JPMorgan Chase &
Company to prevent the failure of American International Group,
AIG, and to stabilize Citigroup and Bank of America.
Now, I suppose when you all get together, you all have a way by
which you decide which of these institutions are systematically or
systemically critical financial institutions. In doing that, you make
a determination about whether or not, for example, Bank of America needs to be stabilized, and whether or not their attempt to purchase Merrill Lynch is in keeping with being stabilized, and your
support of all of that.
What do you determine about Bank of America, and what are
you concerned about in terms of using your resources to stabilize
them? Is the purchase of Merrill Lynch consistent with your wanting to stabilize Bank of America?
Mr. BERNANKE. The Bank of Americas purchase of Merrill Lynch
was consummated or was initiated back in September and approved by its shareholders in the beginning of December. So that
was a done deal as far as we were concerned. Our question was
when Merrill Lynch revealed these very large losses, that we saw
a risk that the combined company, Bank of America plus Merrill
Lynch, would come under severe pressure in the market, and in
some scenarios might fail or default. This is one of the largest financial institutions in the world. It has enormous numbers of
counterparties and participates in many, many critical markets,
and I dont think many people seriously would dispute the view
that the failure of that company would have had enormously bad
consequence not just for Wall Street, but Main Street as well.
Ms. WATERS. As you provide these resources under your tremendous authority, are you concerned at all about AIG and some of the
reported ways that they spend money or have spent money? Does
that concern you at all?

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Mr. BERNANKE. Of course. It is critically important that taxpayer
money be used well and there not be waste or abuse or fraud in
those companies. But if you want me to take the time where I can
do it in writing, we have extensive controls, we have people on the
ground in the company, we attend all the board meetings, we have
a whole set of policies, we put in our own CEO. So we have quite
a few checks and balances to make sure that the expenses that are
incurred at AIG are legitimate business expenses that advance the
interest of the company. After all, if we are going to get paid back
as taxpayers, we dont want the company to fail.
Ms. WATERS. Didnt AIG continue to have expenditures that the
average person would consider unacceptable after your support and
participation with saving them?
Mr. BERNANKE. There may have been a few occasions, but our
overall view and our overall policy is that they have committed to
making only expenditures which have a strong business rationale.
Ms. WATERS. Given that it appears that the policy is that these
institutions are so important that, no matter what, you have to
save them, because in the description of this kind of policy, it is
just too detrimental to the overall economic system to allow them
to fail, what do you think is your responsibility to the smaller institutions, the regional banks and others, who have been begging for
support and assistance forever?
Mr. BERNANKE. Well, of course, all banks were eligible, for example, for the Capital Purchase Program.
Ms. WATERS. Yes, but they must beagain, as you have described, they must be stable institutions where you are not taking
any risk. But the game changes if you are too big to fail. How can
we correct that?
Mr. BERNANKE. Two comments. The first is when we get involved
in a too big to fail situation, usually the terms are much more
onerous and difficult. For example, with AIG we imposed much
tougher conditions than we would on an average bank taking capital from the TARP.
The second comment repeats what I said earlier: Too big to fail
is an enormous problem. We are very unhappy with this problem,
and it should be a top priority to fix it as we go forward so the situation doesnt arise again.
The CHAIRMAN. The gentleman from Texas, Mr. Neugebauer.
Mr. NEUGEBAUER. Thank you, Mr. Chairman.
Chairman Bernanke, I have a couple of questions. I think the
first question is an overall concern that I have. When you look at
the meltdown in the economy, it is just not a domestic issue, it is
a global issue, and we are seeing major contractions in the Chinese
economy, the Japanese economy, and the European economy.
Many of these countries were countries that we enjoyed them
being able to buy our debt because we had a credit deficit or surplus with them. Now, with their economies shrinking and our need
to borrow more and more money, some of the countries that were
selling us oil at $150 a barrel, those prices have gone down. So a
couple of things. One is, what happens when we get to the point
where there arent any buyers for Treasuries out there and we continue to move down the road of throwing trillions and trillions of
dollars at this problem and trying to borrow that?

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Now, one of the things, when you look at the overall bailout of
the markets, some people are quoting $7- to $8 trillion that is committed to this. You have expended your bank at a pretty rapid rate.
With the balance sheet, you are now about $2 trillion with a $42
billion, I guess, net worth.
The question that I have is, what happens when we cant issue
debt and there is more pressure then on the Fed to intervene in
these? And when I look at your balance sheet, I see the monies
that you have actually advanced, but I know, for example, you are
on the hook for $37 billion if Bank of America has some additional
losses; and with Citi, I believe it is $308 billion. I think with
Fannie and Freddie, it is half-a-trillion dollars or maybe more we
have committed to backstop them. I dont see those numbers on
your balance sheet. So when I look at your balance sheet, you have
a 2 percent net worth; you have these contingent liabilities out
there. You would be on a watch list if you werent the Federal Reserve.
So I guess the question is, what happens if we get to that point,
and what is the real number that the Fed is in this game?
Mr. BERNANKE. So, first of all, a couple of points. One is that
even though foreign investments in U.S. securities have gone down,
the investments have gone down on the private sector side, and investments in Treasuries have gone up because Treasuries are very
safe, so there is still plenty of funding for Treasuries.
But I think it is very important that, even as we run a large deficit this year and next year, and the President has said the same,
that we work very hard to make sure that we restore a fiscal balance as soon as possible. So I think that is very important, and if
we do that, that will make it possible for us to finance our way
through this emergency.
On the Federal Reserves balance sheet of $2 trillion, as you
point out, there is no government debt involved there. There is no
borrowing that is not Treasury. And also we have nothing to do
with the GSEs. We are not lending anything to the GSEs.
You are correct in pointing out that we have a fourth loss position for both Citi and Bank of America which under extraordinarily
severe, unprecedented conditions could cause us to lose some
money. But, right now, I feel very comfortable that we are not on
the watch list, that we have plenty of capital, that our likely losses
are quite small. In fact, while I havent put together numbers, I
would guess that the profits we make on our lending programs
would be a very substantial offset to any losses that we might
make.
Mr. NEUGEBAUER. What would you say is growing the Fed too
much? Would you be comfortable growing the Fed to $5 trillion or
$10 trillion?
Mr. BERNANKE. The critical issue, sir, is that while the interest
rate is at zero, there is no real bound, because with the interest
rate at zero, we can essentially borrow at zero or close to zero in
order to finance these funding programs. But, in practice, we have
to worry about the fact that, at some point, and I hope it is sooner
rather than later, the economy will begin to recover, and it will be
necessary then for the Federal Reserve to begin to raise interest
rates. In order to raise interest rates, we have to, among other

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things, there are various things we can do, but among other things,
we will have to bring the balance sheet down to a more normal
size. So all our expansion taking place at this point has to be very
carefully planned to make sure we can unwind it and bring the balance sheet down in time to raise interest rates in order to prevent
any insurgence or incipient surge in inflation.
Mr. NEUGEBAUER. So a $5- or $10 trillion Fed is not necessarily
out of the question?
Mr. BERNANKE. It would depend on the maturity of the loans.
Longer-term loans, borrowing, some other mechanism for sterilizing the effects on the money supply, we couldnt go anywhere
like that. But for overnight loans, we can go pretty high.
The CHAIRMAN. The gentlewoman from New York, but first, I
recognize the gentleman from Pennsylvania for a unanimous consent request.
Mr. KANJORSKI. Thank you, Mr. Chairman.
I ask unanimous consent that the following statements be made
part of the record: a statement from the National Association of Realtors; and a joint statement from the Commercial Mortgage Securities Association and 19 other entities.
The CHAIRMAN. Is there any objection?
There being no objection, they will be made a part of the record.
The gentlewoman from New York is recognized for 5 minutes.
Mrs. MALONEY. Thank you.
Welcome, Chairman Bernanke.
Over the past 6 months, the Fed has been tremendously
proactive in its efforts to preserve liquidity and help our economy
to recover. By some reports, when you add in the stimulus and
other activities, our government has spent or guaranteed over $7
trillion. The question I am hearing from my constituents is not so
much transparency going forward, but backwards. They would like
to know how that money was spent and who were the counterparties and what were the guarantees.
I have been told there have been individual suits and suits by
news agencies that have sued the Fed in a Freedom of Information
Act request for disclosure of borrow banks and their collateral and
that, to date, none of this information has been released. And I am
not going forward on transparency. Everyone is talking about
transparency, but what I keep hearing from my constituents, they
want to know what happened to these guarantees. They want to
know not just that it went to AIG, but then what did AIG do with
it and tracking that.
Is that information available? Can you make that information
available?
Mr. BERNANKE. Congresswoman, I think these numbers that get
thrown around like $7 trillion and $9 trillion and $12 trillion, I
think they are adding apples, oranges, bananas, and grapefruit all
together. They are adding all kinds of incommensurate quantities
into one big number.
Mrs. MALONEY. Well, they were adding the stimulus plan, the
TARP plan, and the Fed window. But lets not use numbers. Lets
say the Fed spending. The Fed spending, what happened to it? Is
that available now? I have been told there have been suits and it
is not available to the public.

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Mr. BERNANKE. First of all, I want to insist that the Fed does
not spend. We lend.
Mrs. MALONEY. Lend. Lend and guarantee.
Mr. BERNANKE. We are repaid. We are repaid, without exception.
We are going to provide as much information as we can. But there
is a good reason. The one, in particular, you mentioned is, why
dont we reveal the overnight short-term loans we make to banks?
In the recent period, almost every big bank and many of the medium and small banks in the country have borrowed from us for
short periods, and we could give that list, I suppose. The risk we
have is that during periods where fewer banks borrow, being put
on that list is some sort of saying to the market, I had to go to the
Fed, maybe there is something wrong with me, and that causes
trouble for the bank.
So if we have to give that information, and we will if Congress
insists, but if we have to give that information, it will destroy that
program and have a significant adverse effect on the liquidity provision and the stability of the financial system. So that is one case
where I think that there is nothing devious going on.
Mrs. MALONEY. Well, that is one case. But in the guarantees,
sort of the bulk guarantees, certainly to know the counterparties
and the guarantees there should be made available.
Mr. BERNANKE. Which one are you referring to, maam?
Mrs. MALONEY. I would say the ones to the major banks, to AIG,
those.
Mr. BERNANKE. The information about AIG and Bear Stearns
and Bank of America and Citi is a monthly report which is given
to Congress. It provides all the information, and we are happy to
try to make sure that all that information is available to the Congress.
Mrs. MALONEY. And that includes the counterparties and the
guarantees and that information?
Mr. BERNANKE. To whom we make the loans? Yes, of course.
Mrs. MALONEY. What gets me is we keep trying so many things,
and what I am hearing from the public and what I hear from my
colleagues in Congress is that the loans are not getting out to the
public. Now, banks say that they are increasing their loans, but
there is some type of disconnect. Maybe they are long-term loans
that were made a long time ago. New credit is not getting out into
the markets.
We just came back from a retreat of the Democrats, and my colleagues were telling me across the country, in every State, they feel
that their constituents are telling them they cant get access to
credit. Very reasonable, respected businesses are having their longterm credit cut, and there is no credit for commercial loans. There
seems to be a huge problem there, and I would like to hear your
ideas.
Obviously, the bank system is the wheel that has to get our economy going, yet we hear that part of the new program is there is
going to be a business and consumer loan program coming from the
Federal Reserve. Why is that coming from the Federal Reserve?
Shouldnt that be coming from our financial institutions? Why cant
we get them working properly? Is the problem the toxic assets? Do
we need to get them off the books?

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I dont think we should have to create a new lending system.
Why cant we get the lending system that has served this country
for decades working? Why is credit not getting out there to the
public, and what can we do about it?
Mr. BERNANKE. Well, Congresswoman, one very important fact
about the American financial system is that only about half of the
loans in normal times come through banks. The other half go
through other kinds of markets, like securitization markets. And
all the programs I described today are about getting credit card
lending, auto loans, student loans, commercial paper loans, mortgage loans, commercial mortgage-backed securities, all those things
going again. That program will help get credit flowing outside the
bank. So that is an important part because that is about half of our
credit system.
Then the other part of the program that Secretary Geithner
talked about this morning is about recapitalizing, taking away the
bad assets and getting the banks working again. So it is really two
parts, and I think you have to address both parts or else you will
not give people the access to the credit that they need in order to
carry on their lives and their businesses.
The CHAIRMAN. The gentlewoman from Illinois.
Mrs. BIGGERT. Thank you, Mr. Chairman.
Mr. Chairman, my constituents have the same problem and are
questioning, when are we going to return to normalcy so consumers
and small businesses and everybody would be able to get loans?
But can you describe in more detail why banks are parking their
excess reserves at the Fed instead of using those excess reserves
to facilitate interbank lending as well as private and consumer and
small business lending?
Mr. BERNANKE. Well, in many cases, they dont haveso the reserves at the Fed are very, very safe and have a very low weight
against capital. In many cases, they either dont have enough capital, or they are simply worried about the creditworthiness of the
borrowers or the demand for lending. That inhibits their willingness to take those reserves and lend them out.
If they were to lend them out and the money supply began to
grow, I am sure Congressman Paul would be very concerned about
that, then the Fed would pull back and let them take the lead. But
for the moment, their capital, their worries about creditworthiness,
and their lack of loan demand and uncertainty about the economy
is causing them to be very reticent.
Mrs. BIGGERT. Isnt this a vicious circle then? Because if we cant
restore confidence of the banks, if we cant restore confidence of the
consumer or anybody, it is just going to keep revolving around that
without having the ability to make the loans that are necessary?
Mr. BERNANKE. Well, I think at this point the reason the banks
and the credit markets are frozen is no longer the legacy subprime
mortgages and those things. It is more concern about where the
economy is going. So I think we need strong action to stabilize the
economy and the financial system. If we can do that, we will get
a virtuous circle rather than a vicious circle that will get the economy back to a more normal state.
But I have to say that this has been an extraordinary episode.
This is the most severe financial crisis since the 1930s, and in all

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honesty, I have to tell you, we cant expect immediate results. We
have to be patient and keep working with it.
Mrs. BIGGERT. Well, then I would love to know what specific
measures could Congress take to further stabilize both the short
and long term of our financial system. But, at the same time, in
your January 13th speech at the London School of Economics, you
talked about a continuing barrier to private investment and financial institutions is the troubled hard-to-value assets that remain on
the balance sheets of these institutions and that these assets significantly increase uncertainty about the underlying value.
Have you looked at the proposal that AON submitted to the
Treasury? And how do you or how will you value these mortgagebacked securities and the toxic assets? And will legislation be necessary, further legislation? It seems like we had that legislation a
long time in the TARP.
Mr. BERNANKE. Well, there are many important legislative steps
to take, including the resolution regime I mentioned and regulatory
reform at a minimum. I am not familiar with the proposal you
mentioned.
The plan that Secretary Geithner described this morning would
work to take assets off of the banks balance sheets at market-determined prices, and the way we would have market-determined
prices would be by using the private sector and the skill and interest and self-interest of those private sector participants in purchasing the assets from the banks, and that would reduce that
source of uncertainty that is now plaguing bank balance sheets.
Mrs. BIGGERT. Just for your information, the AON plan was really taking what we had originally proposed as the insurance in the
TARP proposal, and that was just to codify that how that would actually work. So it has been enacted, but it has never been used. I
would hope you would take a look at it.
Mr. BERNANKE. Thank you.
Mrs. BIGGERT. Thank you.
I yield back.
The CHAIRMAN. In defense of the Chairman, I would note that
the TARP is under the jurisdiction of the Secretary of the Treasury, so that is why that would be his. I would also note that one
of the points that the Chairman has mentioned, the question of
power to resolve institutions that are in trouble, which Mr. Paulson
had also talked about, will be on our agenda when we get to the
whole systemic risk issue.
The chairman of the subcommittee, the gentleman from North
Carolina, Mr. Watt.
Mr. WATT. Thank you, Mr. Chairman.
Chairman Bernanke, you indicate on page 7 of your testimony
that many of the section 13(3) steps that you have taken could
have been avoided or might have been avoided or not necessary
had there been in place what you call a comprehensive resolution
regime aimed at avoiding the disorderly failure of systemically critical financial institutions. That is a mouthful, but I think I understand.
Now, some of these systemically critical financial institutions
have a comprehensive resolution regime in place already, do they
not?

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Mr. BERNANKE. The banks do, yes.
Mr. WATT. The banks. So the ones that you are aimedand with
reference to those banks, whatever regulatory reform might include
enhancing those steps. But outside the banks are other entities
that do not have regulators that are systemically critical or too big
to fail. Is that right?
Mr. BERNANKE. Yes, sir. Examples would be the insurance industry, the AIG example, or investment banks like Bear Stearns or
Lehman Brothers. Primary dealers would be examples.
Mr. WATT. And as we approach the new discussions that we are
having about a systemic regulator, I assume the thinking then
would be to try to put some regulatory framework, or at least when
those entities posed systemic risk to the broader system, a triggering mechanism in place that would avoid things getting worse
and worse and worse. That is what you are saying?
Mr. BERNANKE. Yes, sir. In the case of FDICIA, there is a systemic risk exception which requires majorities of the Federal Reserve Board, the FDIC and the Treasury Secretary in consultation
with the President. So it is a very high bar. But if the systemic risk
section is approved, that means the FDIC could take actions to resolve a bank, for example, that would be, not under normal circumstances, would be extraordinary actions
Mr. WATT. It would be in place for an AIG or an insurance company?
Mr. BERNANKE. That is what I am thinking of, yes, sir.
Mr. WATT. Now, it is the Fed that stepped in under 13(3) to exercise the authority to keep systemic risk from materializing even
and getting worse. Would it be appropriate to think of the Fed as
a potential repository of the authority as the systemic risk regulator, or is that something that is really different in your mind
from what the Feds real purpose for existence is or has been at
least historically?
Mr. BERNANKE. I think there are two separate questions. One
has to do with the resolution of large firms. I would think there
the natural place for the authority would be in the Treasury, because fiscal funds might be used in consultation with the Federal
Reserve and other agencies.
The other question you are asking me is about a regulator that
looks at the broader system and looks at how firms and markets
interact and doesnt just focus on each individual institution, the
way our system works now. I think that is an important idea. I
think we need to work towards having more systemic oversight. I
think the Federal Reserve would have a role to play in that, because we have a long-standing commitment to financial stability.
We have very broadbased expertise. We have the lending authority
under the discount window. But that being said, I think there are
many ways that you could structure that that would be satisfactory
and would be effective.
Mr. WATT. And can you just identify some of the other players
that would have a dog in that fight? The Fed, obviously?
Mr. BERNANKE. Some of the other players would be the Treasury,
the SEC, the FDIC, the OCC, a number of different agencies that
have broad interests in the CFTC, have interests in various aspects

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of the markets, could work together in some way to look for risks
that are emerging.
Mr. WATT. But if you diffuse this too much, I mean, nobody has
control of it.
Mr. BERNANKE. Yes, sir. I think you would have to think hard
about what the right governance is, and I think that is a very big
question.
Mr. WATT. Thank you, Mr. Chairman.
I yield back.
The CHAIRMAN. The gentleman from Texas, Mr. Hensarling.
Mr. HENSARLING. Chairman Bernanke, allow me to somewhat
follow up on my colleagues line of questioning since there is some
serious discussion within congressional circles of adding additional
responsibilities to the Fed, that being systemic regulator.
Clearly you now have the responsibility of monetary policy. You
could have the responsibility of becoming systemic regulator. You
have the responsibility in many cases of being bank regulator. You
have consumer credit responsibilities, and somewhere along there,
I think, is taxpayer protection as well.
Do you believe that the Federal Reserve is poised to handle what
many view as competing interests or goals? Do you believe that
this can compromise your ability to manage monetary policy?
Mr. BERNANKE. Congressman, I think the overload issue is a real
issue. I take it very seriously. Whoever manages the Federal Reserve would have to worry about allocating resources and so on. As
I was saying to Congressman Watt, there are probably a number
of different ways to organize in this, and the Fed might be the
principal regulator or it might be coordinated with others. It would
depend on what is Congress view as the most effective mechanism.
But I do think the Fed already has substantial systemic responsibilities that have gone back to the founding of the Federal Reserve. The Fed was founded principally not to manage prices or
output but to manage financial crisis. That is why the Federal Reserve was created, and it has a long tradition of being involved in
those issues.
So I think that you would probably not have an effective system
without the Feds involvement. But, again, I am very open as to exactly how the governance of that would work and how resources
would be allocated and so on.
Mr. HENSARLING. There has been some discussion as well within
congressional circles of exploring specific inflation targets for the
Fed. I am curious about your opinion of explicit inflation targets.
Mr. BERNANKE. Well, as you know, Congressman, I have long
had the view that I think that would be a constructive step. We
have gone slowly in that direction, and to some extent, we would
be interested in Congress views.
Mr. HENSARLING. Not by way of criticism, but by way of observation, many economists believe that but for the actions of the Federal Reserve earlier in this decade fueling the then existing housing bubble, that we would not have the economic turmoil we have
today. Again, nothing is quite as clear to us as 2020 hindsight.
But do you have an opinion on, if we had had explicit inflation
targets earlier in the decade, whether or not we might have avoided the present economic turmoil?

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Mr. BERNANKE. Congressman, I have a very open mind about
this, and I think it is very important to understand what went
wrong, and there are probably many elements that contributed to
the crisis.
I do not think the evidence supports the view that Federal Reserve monetary policy in the early part of this decade was the principal source of the crisis. I think the principal source of the crisis
had to do with the huge capital inflows coming from our trade deficit which overwhelmed our system and made risk management inadequate.
That being said, I think we need to review monetary policy and
make sure in particular that we dont err in terms of leaving policy
too easy too long. Now, whether inflation targets would have
helped, I am not sure. One of the key proponents of this view that
the Federal Reserve kept rates too low explains the worldwide nature of this crisis by saying all the other central banks did the
same thing, and most of them had inflation targets.
Mr. HENSARLING. Let me change the line of questioning. In exploring your powers under 13(3) as I have studied this and asked
experts, and certainly your opinion is a relevant one, what is it
that Treasury can do under TARP that the Fed cannot do under
13(3)?
Mr. BERNANKE. Well, critically, and this is why the former Secretary and I came to Congress to ask for the TARP, is that the
Treasury can inject capital. The Federal Reserve can only make
loans, and those loans must be secured to the satisfaction of the
Reserve Bank that makes the loan.
Mr. HENSARLING. That is to your satisfaction.
Mr. BERNANKE. Yes, but we have legal counsel and other documentation, which means it is not a trivial requirement.
Mr. HENSARLING. My time is about to run out, but in your testimony on page 6, you say that at some point 13(3) will be wound
down as required by law.
As I read the law, I dont see what requires you to necessarily
wind it down. Can you cite me the provision?
Mr. BERNANKE. Yes, sir. The law requires that we find that conditions be unusual and exigent. So when financial markets begin
to look more normal, we would no longer have the authority.
Mr. HENSARLING. But it is your determination?
Mr. BERNANKE. That is correct.
The CHAIRMAN. The gentleman from California.
Mr. SHERMAN. Thank you, Mr. Chairman.
We ask the country to strive toward the best possible policy options, not just to joyfully embrace anything on the theory that it
is better than inaction. This especially applies to dealing with collateral benefit for the malefactors of risk on Wall Street. We need
to work to eliminate the subsidies to Wall Street firms and to close
the giant loopholes in executive compensation limits.
Transparency is good, but insufficient. We see clearly, transparently, that the Federal Government was screwed out of $78 billion. We see billions of dollars in bonuses. And Wall Street firms
are going to keep the $78 billion; the executives are going to keep
the bonuses. Sunlight may be a disinfectant, but it does not kill all
pathogens.

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Chairman Bernanke, your statement was good, but it did not
contain a single dollar figure. I hope you would provide for the
record in a simple dollar amount the total risk taken by the Fed
so far. By that I mean, assume that every security that you own
or have a lien against is worthless except for those backed by the
full faith and credit of the United States; what is the total amount
that taxpayers would have lost by actions taken so far by the Fed?
Now, I know that you have told us you believe you are fully secured, but Wall Street gave AAA to Alt-A. The Secretary of the
Treasury overpaid by $78 billion, and he says he was trying to pay
par. He was just off by 31 percent. So you can imagine there is
some distrust in the country as to what fully secured means or
whether Wall Street and the financial establishment is correctly
valuing assets and risk.
Section 13(3) is an enormous grant of power. I know you have
told us that you can only make loans if you are secured to your satisfaction, but as Mr. Hensarling pointed out, in the hands of another Chairman of the Board, that could be no limit at all. And
under desperate circumstances, even you might say, well, I am satisfied with bad security; otherwise, the entire country is going to
collapse, and so I am satisfied to be able to do something.
I cannot think of the words that will really limit you in terms
of the quality of the loans you make. It is up to you what is good
security, what is bad security and what is in the national interest.
So if we are going to limit your power at all, we can do so in terms
of quantity.
Mr. Chairman, would you actively oppose legislation that limited
the total risks that you can take to $12 trillion, to say that all of
the risks you take, other than the purchase of securities backed by
the full faith and credit of the United States, cannot exceed $12
trillion? And if that is a bad dollar amount, what else do you suggest, or is it necessary for the quantity of your power to be utterly
unlimited?
Mr. BERNANKE. Well, our balance sheet is currently $2 trillion,
of which 95 percent I would say is gold-plated secure and the rest
is largely secure. So $12 trillion sounds very comfortable to me. I
dont think that would be a problem.
But, quite frankly, seriously, we take very seriously our obligation to make sure that our loans are well-secured, and I think that
a loan to a strong financial institution overnight with collateral,
given that we have never lost a penny in such a loan, is not adequately considered as being a highly risky loan.
Mr. SHERMAN. I dont consider it highly risky, but I think there
should be limits on the low risk that you take.
Moving on to my next question, the oversight board on TARP has
documented that the taxpayer got screwed by $78 billion by certain
institutions who received cash and gave us securities worth far less
than the cash they received. I believe that the taxpayer should be
unscrewed. That is to say that these institutions should provide
additional securities to Treasury to fully compensate us for the
cash we have given them.
Those firms that refuse to unscrew us, those firms that say,
thanks for giving us $10 billion for $7.5 billion in securities and we
are keeping the difference, can they do business with the Fed as

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if they were snow-white virgins; that they are eligible to participate
along with everyone else? Or will you join in this effort to say that
that $78 billion shortfall should be made whole, and that aside
from purchase of U.S. securities, you will not provide bailouts to
the malefactors that have underpaid us by $78 billion?
Mr. BERNANKE. I think that $78 billion number has been misinterpreted. In the newspapers, it sounds like that is money that
has been actually lost from the principal, which is not the case.
Mr. SHERMAN. No, no, no. I think, Mr. Chairman, I do understand the report.
The CHAIRMAN. The gentlemans time has expired.
The gentleman from South Carolina.
Mr. BARRETT. Mr. Chairman, it is good to see you.
We sent an e-mail out yesterday, Mr. Chairman, to folks in
South Carolina, and these are just a sample of the questions that
I had for you to be asked today, because people are concerned
about what is going on.
I am concerned. I am concerned about what happened with the
Treasury and the implementation of the TARP, oversight, transparency.
In the same breath, I am concerned about the Fed, too. You guys
have spent hundreds of millions of dollars with a lot less oversight.
So if you can, Mr. Chairman, let me just ask you a couple of simple
questions, and I want you to explain these to these folks right here
in terms that they can understand.
Number one, after all the stuff that you have done, after all the
stuff the Treasury has done, why havent the credit markets come
back?
Mr. BERNANKE. A two-part answer. First of all, the financial crisis has been extraordinarily severe, and those financial effects are
incredibly powerful. And the intensification of the financial crisis in
September knocked the global economy for a loop, which it is now
just beginning to get its feet. So I think that the actions that were
taken prevented a much worse situation, a meltdown that would
have led to a catastrophic and long-term low level of activity. So
the fact that we havent gotten back to normal is just consistent
with the experience that financial crises are very, very serious matters.
The second answer I would make, though, and I would just like
to emphasize that all these programs I talked about, the program
for consumer and small business lending, the mortgage-backed security program, the interbank lending program that affects LIBOR,
all these things have already shown up as improvements in those
credit markets which directly affect people in South Carolina. They
are not banks and investment banks.
The 30-year mortgage rate affects your constituents. The commercial paper rate affects the company they work for. The rate on
auto loans, on student loans, on credit card loans, all those rates
will be affected by the programs we are undertaking. We are doing
this, not because we have some nefarious scheme; we are trying to
help the American economy recover, and we are using whatever
methods we have to overcome what has been an enormous blow
from this financial crisis.
Mr. BARRETT. And I hear you, Mr. Chairman.

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A second question: Do you have, the Federal Reserve, do you
have an overall arching goal that underpins the decisions of when
and how you intervene into the market, that is what they want to
know; and number two, when do you stop? When do you draw a
line? When do you say, okay, no more?
And I guess that is part of the third question, how much more
is it going to take?
Mr. BERNANKE. So, as I have tried to emphasize throughout the
hearing, there are two types of intervention. There are the interventions that have involved trying to stabilize systemically critical
firms whose failure would create substantial problems for the financial system and the economy. As I have indicated, I am very
unhappy about having to be involved in those things, and the sooner I can shed that responsibility, the happier I will be.
On the other side, the other type of activities has to do with our
expansion, trying to create and stimulate credit markets where
credit markets have broken down. And there, we want to keep
looking for situations where we believe we have tools that can get
the markets working again; that will create lower rates or better
credit availability; and will stimulate the economy.
I think those things are in the interests of the people and that
it can be explained to them that it is in their interests. I dont
know how much more, but I think, given the severity of the situation, that we do expect to expand somewhat more to address the
severe dislocations we are seeing in a number of key credit markets, including consumer credit markets
Mr. BARRETT. When you are talking about expanding more, can
you be a little more specific?
Mr. BERNANKE. For example, the so-called TALF, the assetsbacked securities program, was slated for $200 billion to support
new lending in credit cards, student loans, auto loans and small
business lending. As part of the plan announced this morning by
Secretary Geithner, the Treasury and the Federal Reserve would
collaborate to bring that amount up to $1 trillion, which would be
another $800 billion of credit made available to broad categories of
consumers and businesses.
Mr. BARRETT. Last question. Yes or no, was the first $350 billion
of the TARP spent well?
Mr. BERNANKE. It was critical to stop the meltdown that would
have occurred otherwise.
Mr. BARRETT. Was it spent like it was sold to the United States
Congress? Yes or no?
Mr. BERNANKE. There was a confusion in the sense that there
was an honest representation of the goals of the program to focus
on taking assets off of balance sheets, which I believe was an appropriate objective and we are now returning to it. But shortly
after the bill was passed, the global financial crisis erupted. The
purchase of assets was not fast enough to address it, and so capital
infusion was the only method that would save the situation.
Mr. BARRETT. I will take that as a no.
Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from New York.
Mr. MEEKS. Thank you, Mr. Chairman.

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Mr. Chairman, I have really two separate questions that I want
to ask. The first goes toward local municipalities. I actually had a
big question with my comptroller in the City of New York, and we
started talking about munibonds that the City of New York tries
to, has to sell. It is important for them to sell the variable rate
debt.
One of the things that they had indicated to me that was tremendously important was that, under the numerous programs that
were designed for banks and security firms to use as commercial
paper to credit cardholders, that they can continue to get access to
credit. But the one group of borrowers that I am told left out of all
this help is State and local governments. I am told the conditions
in the municipal bond market are better than they were 2 months
ago but by no means back to normal, and many State and local
governments want to borrow to finance new construction projects.
We have a lot of new construction projects but cannot access the
capital market at reasonable terms.
So the question is, do you think to help these local governments
and municipalities, would you support initiatives designed to make
financing more readily available to States and localities, such as
providing standby liquidity facilities for variable rate municipal
bonds?
Mr. BERNANKE. Sir, I think that is something that the Congress
ought to consider if the Congress has close relationships to the
State and local municipalities, and certainly that would be something that could easily be done by the Congress.
It is actually more difficult for the Federal Reserve for a number
of reasons, technical and otherwise. But one I would point out is
that the 13(3) authority, as broad as it is, excludes loans to municipalities, so we could not do that, at least not directly.
But I do think that addressing the credit issues of State and
local governments might be one way to help them, even though, as
you point out, the municipal credit markets have improved somewhat.
Mr. MEEKS. Well, what about iffor the new liquidity being provided through some kind of receipt of TARP assistance, for example
to carry a requirement that some of the new credit capacity be directed strictly to municipal issuers?
Mr. BERNANKE. Well, I would ask you to direct that to Secretary
Geithner. It would really be his call.
Mr. MEEKS. Let me then move to another area that I think is of
critical importance as we move forward. I have also been looking
at a number of individuals who talk about the lack of availability
of warehouse lending credit facilities. We had a hearing back, I
guess it was a couple of weeks ago, and we heard testimony that
85 to 90 percent of the warehouse lending capacity is gone from the
market, and some of the remaining warehouse providers may not
stay in business. I know that lowering the overall rate is one thing.
But if there is no money available by the warehouse lenders, then
there is nothing to do at closing, and so people will not be able to
take advantage. You know, we want to get folks to refinance or to
be able to mitigate the mortgage they are in, but there needs to
be some additional money therein.

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So, first, I want to make sure you are aware of this problem, and,
second, what impact will it have in the marketplace if we stimulate
demand for mortgages without ensuring adequate funding capacity
at closing tables across the country for the warehouse credit facilities?
Mr. BERNANKE. Well, I need to look into that to give you a better
answer. But, as I indicated, as Secretary Geithner indicated, the
TALF program will be looking at other mortgage-backed securities,
including both residential and commercial. It is possible that might
be included in that category, but I dont know.
Mr. MEEKS. So it is possible, but you dont know.
Mr. BERNANKE. No, sir, I dont.
Mr. MEEKS. Could you get back to me or get back to the office,
because that becomes tremendously important. I know Secretary
Geithner is coming up next week, was talking about the second
portion, at least with the TARP money; how are we going to take
care of those home mitigations. So it is important to me I think
that it is clear whether or not there is going to be that additional
money for the warehouse facilities. Is there a way that you can
Mr. BERNANKE. Well, there may bewe need to understand exactly how the market works and what technical issues would be involved in doing it. So I just dont have the information to answer
you. But it is certainly something we will put on our list and look
at and see if it is, you know, something that will work. For example, if it isnt securitized through an asset-backed securities-type
mechanism, it wouldnt fit with our structure. But we will certainly
look at it.
The CHAIRMAN. The gentleman from North Carolina.
Mr. HENRY. Thank you, Mr. Chairman.
And thank you, Chairman Bernanke, again, for testifying. This
is very helpful and constructive, not just for us on the committee,
but for the American people, to know the actions you are taking,
and we appreciate it.
Secretary Geithners proposal this morning or outline or vague
outline or bullet points, whatever he offered, it mentions the extension of the term asset-backed securities lending facility to other
types of assets. One area in particular that some of us have concerns about are commercial-backed mortgage securities. That market has dried up in assets. There was $270 billion lent in 2007; $12
billion in 2008; and a number of loans are coming due in 2009. And
so we have seen a vague reference to this. If, in fact, the lending
will be extended or the TALF program will include CMBS, when
do you see that being up and running and functional?
Mr. BERNANKE. Well, as you know, the initial program is not yet
quite running. It is still going to be a couple of weeks before it is
operating, and we are probably going to learn a bit about how it
works and what other technical issues might arise. So I would be
a little bit hesitant to give you a very precise number. But what
I can say is that there is a lot of agreement that the CMBS problem is quite serious and that it would be a very strong candidate
for being included at the nearest possible date in the TALF program.

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Mr. HENRY. Okay. There is mention that it would only incorporate the newer, recently originated CMBS. Is that in fact the
case, or is this going to be extended to a larger array of CMBS?
Mr. BERNANKE. It doesnt necessarily mean that it deals only
with new buildings. If there is a refinance which is then
resecuritized and therefore it is resecuritized and then re-rated,
then that would will be eligible for our program. So a refinance
would be, if newly securitized, would be eligible.
Mr. HENRY. Certainly.
There is a challenge the Fed has of managing inflation. Congressman Hensarling had a question about inflation targets. I kind
of want to go to the next step here.
A number of concerns that I and my colleagues have are about
the long-term economic growth. We saw with the stimulus package
that the CBO says in the end, this, quote-unquote, stimulus spending bill will crowd out capital and in the outyears have a negative
economic impact. Likewise, some of the actions that the Fed is taking as well as the TARP program in TARP 2 is this mass infusion
of money into our economy, and I believe that this will cause inflationary pressures on a mass scale.
Now, I am certainly not a Ph.D. and not as learned as you, but
I would like to have your input on how we avoid rampant inflation
like we have seen before in this country?
Mr. BERNANKE. That is a very good question and one we take
very, very seriously. In the near term, inflation looks to be very
low. In fact, we are seeing disinflation, so we dont see inflation as
anything like a near-term risk. However, it is certainly the case
that when the economy turns around, which it will, and begins to
grow again, that in order to avoid inflation, the Fed will need to
undo its balance sheet expansion, need to bring down these programs, or use other methods to sterilize the effects of our programs
on the money supply.
We understand that. We will look at it very carefully. That is one
of the chief things we look at at our FMOC meetings. We want to
be sure that whatever actions we take, which under the current
circumstances will not be inflationary given how slack the economy
is and how commodity prices have come down and so on, we want
to be sure that when the time comes, we will be able to tighten appropriately to make sure that inflation does not in fact become a
problem.
I am entirely persuaded that stable prices are critical for longterm economic health, and we at the Federal Reserve are absolutely committed to assuring that.
Mr. HENRY. So you dont have a fear of 1970s-style stagflation?
Mr. BERNANKE. Well, I think the main risk for stagflation would
be if we dont fix the banking system. We saw in Japan, for example, or in the 1930s in the United States, that if the financial system is badly damaged and left to wither, that it is very difficult for
entrepreneurs to get credit, for firms to invest, and that has a very
negative effect on growth. So I think that it is absolutely essential
that however difficult it may be, that we get the financial system
running again. That will allow the economy to return to a more
normal growth path.

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Mr. HENRY. In closing, why do you believe the credit markets
havent normalized?
Mr. BERNANKE. They havent normalized, first, because they
were traumatized by the huge losses and the failures and all the
factors that have created much risk aversion and caused people to
pull back from markets. But now, going forward, the main concern
of many bankers and others is the uncertainty about where the
economy is going. If the economy is weakening, that means that
credit quality is going to deteriorate, and that makes it harder to
make loans and makes you more worried about your capital.
So we need both to stabilize the economy and to stabilize the financial system. You have to have both in order to get a return to
growth.
The CHAIRMAN. The gentleman from Kansas.
Mr. MOORE. Chairman Bernanke, I think a lot of the people in
our country and I are very concerned about the huge bonuses handed out by Wall Street last year; according to the New York State
Comptroller, $18.4 billion. This is happening at a time of national
emergency where the Federal Government is providing billions of
dollars of taxpayer funds to stabilize the financial sector.
Last week, I filed a bill, H.R. 857, the Limit Executive Compensation Abuse Act, which would limit the annual executive compensation, including salary, bonuses, and stock options to the same
compensation paid to the President of the United States, $400,000,
and a couple of days after I filed that, President Obama announced
new requirements on TARP limiting future recipients an executive
compensation cap of $500,000.
I understand the Feds TALF program utilizes $20 billion of
TARP funds and perhaps even more after Secretary Geithners announcement today. For firms that receive any of these TARP funds,
via TALF or other Federal programs, will the Fed or the Treasury
be responsible for enforcing the new executive compensation requirements?
Mr. BERNANKE. Absolutely.
Mr. MOORE. That will happen. You will personally assure that is
done?
Mr. BERNANKE. We have systems in place that will require them
to attest that they need it. That will be audited, and we will confer
with the Treasury and IG to make sure those things are followed
through.
Mr. MOORE. Thank you, sir.
The CHAIRMAN. The gentleman from New York.
Mr. LEE. Thank you, Mr. Chairman.
I appreciate the opportunity to voice the concerns of many of the
constituents in my district. The Feds balance sheet, I believe,
today sits at over $2 trillion. We have authorized over $700 billion
in TARP 1 and TARP 2. Today, Secretary Geithners new proposal
could put several hundred billion dollars into play in some form of
a TARP 3. On top of that, we are sitting at record national deficits,
and the budget deficit, I believe, this year will be over $1.2 trillion.
I was an economics major way back when at the University of
Rochester, and it is hard for me to see this when I look at what
impact this will have on crowding out investment, the potential im-

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pact on the staggering amount of borrowing we are going to have
to do and what impact that will have on interest rates.
I am curious, in your view, how are we going to go out and borrow unprecedented trillions of dollars into the market and what
impact that may have?
Mr. BERNANKE. Thank you.
First, I would like to make the point that the $2 trillion Fed balance sheet is not government debt. In fact, the $2 trillion Fed balance sheet is a source of income for the government because we
lend at higher interest rates than we pay, and that difference, socalled seigniorage, is paid in the tens of billions of dollars to the
Federal budget every year. So that is a profit center, not a loss center.
With respect to the other issues, though, in terms of the deficits,
you are absolutely right that the deficits planned for this year and
next year are extraordinarily large. They reflect the severity of the
overall economic situation. Partly they are caused by the recession
itself, which is hitting tax revenues and so on. And as the President and others have emphasized, it is very important that discipline be regained as soon as possible consistent with getting this
economy going again and getting the financial system going again.
Because if we leave the system in kind of a stagflation kind of situation, without growth, then the debt will be that much harder to
service in the long term.
But your point is absolutely right, that the deficits are an issue
and a concern. It will raise the debt to GDP ratio of the United
States probably by about 15 percent points. That is tolerable for a
growing economy, but we do need to make sure, first, that we are
growing and, secondly, that we have mechanisms to unwind these
fiscal expenditures and loans as the economy improves.
Mr. LEE. Just one last question as a follow-up. Do you have any
concerns about the balance sheet of any of that debt not being paid
back? You mentioned that right now it is a source of income. Are
there any risks associated with that?
Mr. BERNANKE. So, as I said, the risks are somewhat greater in
that 5 percent of the balance sheet where we have been involved
in financial rescues. And specifically, in the Bear Stearns portfolio,
on a mark-to-market basis, we are now in the red on that portfolio.
I would defend still the decision, because I think the costs of letting
Bear Stearns fail would have been many, many times greater than
whatever costs we may or may not yet experience, because that is
a mark-to-market, we are not selling. But as I was trying to indicate before, the great majority of the portfolio, 95 to 98 percent, is
extremely low risk and is very comfortably considered a source of
income for the government.
Mr. LEE. Thank you.
The CHAIRMAN. The gentleman from Massachusetts.
Mr. CAPUANO. Thank you, Mr. Chairman.
Thank you, Mr. Chairman, for being here again. I want to go
back for a minute when Mr. Meeks
The CHAIRMAN. If the gentleman would yield, if the Speaker
doesnt stop expanding this committee, next year you will be testifying in the round.
Mr. CAPUANO. I thought he already was.

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Mr. Meeks has suggested some assistance for cities and towns,
and I think, a year ago, most people would have thought that the
Fed wouldnt be involved with loaning billions of dollars to unregulated investment banks, mutual funds, or getting into credit card
debt, auto debt, student debt. I dont think anybody would have
really thought you would be doing that now.
You found a way to do that. Find a way to help the cities and
towns and the States, maybe through insuring their bonds, if you
cant actually take the bonds. I understand what the law says, but
I also have absolute and total faith in your ability to go around any
law that is clear and unequivocal.
Mr. BERNANKE. I appreciate your confidence.
Mr. CAPUANO. It is only for the good things.
Mr. Chairman, I want to talk a little bit about the thing that was
announced today. I know that in some ways my questions should
be addressed to Secretary Geithner. But as I read it today, you
have chosen to now get married, and once you are married, you do
have to answer for your spouse, as I do, as my wife does. When I
write a bad check, she has to explain it.
The Treasury, and, again, I understand this, with the new Administration and new Treasurer, there are some things that have
to begin anew, and that is one of the reasons I voted for the second
$350 billion; not voted for it, but I understood where it had to go
and understand that.
At the same time, there are some people in the same places. Mr.
Kashkari is still there. To my knowledge, he still believes that individual institutions shouldnt report anything. It still questions me
as to who? Is it going to be you, or is it going to be the Secretary
of the Treasury who values these bad assets when we go out and
buy them, because we all know that is the real underlying problem
we have with the whole issue, is valuing these things. Is it going
to be you, or is it going to be somebody else?
Mr. BERNANKE. We are not married. We are just good friends.
The Treasury, of course, is responsible for the execution of this program. Under the plan which Secretary Geithner expressed today,
the valuation of the assets would be at least substantially done by
private parties who are experts in this area and who are acting in
their own interests. He will be discussing that I am sure in great
detail with the Congress.
Mr. CAPUANO. Well, I would much prefer you do, and the reason
is, obviously, I believe all you have said thus far. I have read all
of the documents. I believe that the decisions you have made are
relatively safe. I feel confident where we are.
We all know that the Treasury, again, not this Treasurer or the
past Treasury, didnt do such a good job valuing assets. And I have
a really hard time trusting the private market, who actually valued, I assume it is not new people who came in in the last 5
months, it is going to be the exact same people who got us into the
mess in the first place valuing these assets. So their professionalism I think is subject to question based on the current economic crisis we have. They created the economic crisis, number
one.
Number two is their motivation. Your motivation is to save this
economy, because that is your job. That is who pays you. Their mo-

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tivation is make money. God bless them, it is the American way.
It is not a problem.
But I am not interested in private investors making money on
the backs of taxpayers. I would rather have you do it. You have the
motivation I trust. You have the professionalism I trust. You have
the professionalism that, up until this point, has proven more accurate than those, and I would strongly suggest it is your money they
are going to use. Dont write those checks unless you are comfortable with those values, because otherwise, I dont mean to be
disrespectful, but you will be back on the hot seat along with them.
Mr. BERNANKE. Sir, I just want to be clear on the joint effort on
the TALF, the asset-backed securities program, the Federal Reserve will certainly take full responsibility for valuations.
Mr. CAPUANO. That is exactly what I wanted to hear. Because I
guess the other question I want to follow up on, in this provision,
when you had some concerns, some general concerns that we cant
make private entities do anything they dont want to do, report
anything they dont want to report, because then they wouldnt
take the money or something like that, and yet I am reading this
release today, and it says that all recipients of capital investments
in the new initiatives announced today will be required to commit
to participate in mortgage foreclosure mitigation programs.
I happen to think that is a good thing. But if they can be required to do that, why can they not be or why should they not be
required to do things like tell us what they have done with the billions and billions of dollars that we have given them? If we can do
this, why cant we or why shouldnt we do that?
Mr. BERNANKE. As I understand it, sir, the program will require
them to report on a monthly basis on their loans and other activities.
Mr. CAPUANO. What about the past money?
The CHAIRMAN. Will the gentleman yield?
Mr. CAPUANO. I certainly will.
The CHAIRMAN. The Special Inspector General is in the process
of imposing that requirement on recipients in the past. He ran into
some problems with OMB, who declared the Paperwork Reduction
Act interfered with that. We had some conversations about that,
and that has been cleared up. So Mr. Barofskys demand that all
the current recipients comply with that is in the process of being
sent out.
Mr. CAPUANO. I am a happy, happy guy. Thank you, Mr. Chairman.
Thank you, Mr. Chairman.
The CHAIRMAN. Would the recorder please take note that today
was a day on which Mr. Capuano was happy. We dont always have
those.
Mr. CAPUANO. Dont get used to it.
The CHAIRMAN. The gentleman from Florida.
Mr. POSEY. Thank you very much, Mr. Chairman.
This is fairly elementary. But when we were on a gold standard,
it was pretty easy to tell where we stood. Would you agree with
that?
Mr. BERNANKE. It was a simpler system, yes.

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Mr. POSEY. And off the gold standard now, how would you best
summarize what substantiates the value of our money, in the
shortest possible explanation?
Mr. BERNANKE. It is the central bank which establishes the
money supply which in turn affects the rate of inflation. So it is
the integrity and professionalism of the central banks and their
mandates that has succeeded in keeping inflation quite low in the
world for the last 20 years or so.
Mr. POSEY. But we dont have access to their balance sheets, do
we?
Mr. BERNANKE. We have done a review of the balance sheet disclosures and so on of the major central banks around the world,
and the Fed is as good as any. But they do provide general information about balance sheets, yes.
Mr. POSEY. But we dont havelike the Feds, we have never
seen the Feds balance sheet either, have we?
Mr. BERNANKE. Yes, sir. Every week in the H41 there is a breakdown of our lending programs and details on the maturities of the
different loans, and we are looking to add more information.
Mr. POSEY. So why would they be exempt from audit then?
Mr. BERNANKE. They are not exempt from auditing. We have an
outside auditor that does annual accounting. We have an Inspector
General. And we have internal mechanisms, internal divisions,
that look at the practices and management.
Mr. POSEY. What practices were in the statutes that I saw that
were exempt from audit so they could not be audited?
Mr. BERNANKE. Congressman Paul, and frankly, this was news
to me, says that certain international types of transactions are not
subject to the review of GAO. If that is the case, again, as I said,
I wasnt aware of it, but certainly they would be subject to the review of the external auditors and our internal audit teams in the
IG.
Mr. POSEY. There are three paragraphs, for your information, of
exemptions. It is not just one international audit. We sat here and
we heard from Mr. Markopolis who told us about the Ponzi scheme
that he exposed at the SEC 10 years before Madoff basically turned
himself in, and with all due respect, one cant help but be captivated by the possibility we are running the biggest Ponzi scheme
in the world right now.
We are not really trading anything. We are running up values.
We are borrowing from Peter to pay Paul. But there is nothing
added to the bottom line. It is just hard to explain or it is hard for
me to conceive that we are headed in the right direction like that.
Mr. BERNANKE. Well, speaking for the Federal Reserve, we have
a very clear knowledge of our liabilities and assets, and they are
well matched. We dont have any kind of Ponzi scheme or other
such thing going on.
Mr. POSEY. Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman from Texas, Mr. Hinojosa.
Mr. HINOJOSA. Thank you, Mr. Chairman.
Chairman Bernanke, I have a great deal of interest in the federally guaranteed student loan programs, so for my 5 minutes I will
focus on that area.

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The not-for-profit secondary markets for student loans have been
decimated by the failure of the auction rates securities market.
These lenders have played a key role in the federally guaranteed
student loan program as well as have been providers of low-cost,
consumer-friendly, non-Federal loans to fill the gaps between the
cost of attendance and what is available through Federal financial
aid.
I received the announcement today that the Federal Reserve
Board is prepared to increase the size of the term asset-backed securities loan facilities, better known as TALF, and could broaden
the eligible collateral to encompass commercial mortgage-backed
securities as well as private-label residential mortgage-backed securities and other asset-backed securities.
Mr. Chairman, I was going to ask for unanimous consent to enter
a document into the record of todays hearing. When he returns,
maybe he will give
Mr. WATT. [presiding] Can you identify what the document is
and
Mr. HINOJOSA. I wanted to ask for the remarks by Treasury Secretary Timothy Geithner, introducing the Financial Stability Plan,
dated Tuesday, February 10th.
Mr. WATT. Without objection, it is so ordered.
Mr. HINOJOSA. Thank you.
Chairman Bernanke, at the last hearing at which you testified
before us, I asked why the term asset-backed securities loan facility will help these lenders return to making the purchasing student loans and was told that you were seeking stakeholder input.
What more can you tell me about all of this?
Mr. BERNANKE. There are several fronts on which the student
loan issue is being addressed. To begin with, those auction rate securities markets have largely dried up. Like many other types of
securitization markets, they involve short-term financing of longterm assets, and that has not proved to be stable in the current environment, which is one reason why our liquidity provision has
been supportive.
But three things: First, the Federal Reserve, as you point out,
has included government-guaranteed student loans in our assetbacked securities facility and, you know, we stand ready to do that.
Second, using, I believe, the Kennedy-Masterson law, if I recall
the title, the Department of Education has set up a backstop facility to purchase student loans, including legacy loans or combination loans, and they are working with that.
And then third, though, I would just comment that one of the
problems with the student loan market has been the misalignment
of commercial paper rates and LIBOR rates, which has made it unprofitable for banks, given the formulas in the student loan law, to
issue new loans. So Congress has a role here as well.
I strongly recommend that you take a look again at the compensation formula. If you want private-sector lending involved in
the student loan market, you need to address the problem that,
under current rules, the student loan lenders would be looking at
a negative rate of return, and that has to do with the way that
their formula is structured, for what they earn on their loans. So
Congress could do a lot to help that situation.

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Mr. HINOJOSA. With what we are investing in the financial sector, and with the fact that approximately 97 percent of the federally guaranteed loans are guaranteed by the Federal Government,
it seems to me that this is probably the lowest-risk loans that they
could possibly make. That they want to have a bigger spread, I
dont believe that is fair to the families who are trying to get their
students to be able to go to college and afford them.
Let me ask a second question: What plans do you have to ensure
that the State and not-for-profit lenders are able to continue fulfilling their mission?
Mr. BERNANKE. Sir, I was asked to look at that by a previous
speaker, but as I mentioned, there are limitations on our authorities to lend to governments; and it seems, given the longstanding
relationship between the Federal Government and the State and
local governments through block grants and so on, that a natural
approach would be for the Congress to authorize backup facilities
or some other support for credit extension to nonprofits and municipalities.
Mr. HINOJOSA. Thank you.
Going to my last question, the troubled asset loan facility program aims to create availability for credit cards, auto loans, student loans
Mr. WATT. Unfortunately
Mr. HINOJOSA. I yield back, Mr. Chairman.
Mr. WATT. the gentlemans time has expired.
Let me announce that the Chairman has to leave at 4:00, so if
we keep going fairly quickly, I think we will be able to get to virtually everybody. So we will try to keep on a tight string.
Mr. Price from Georgia.
Mr. PRICE. Thank you, Mr. Chairman.
I appreciate your coming again and being with us. You have described your role in the current challenges in many ways. I think
I wrote these down correctly. One of them was to stabilize systemically critical firms and that you felt that the sooner you could
leave that role, the better. Is that accurate?
Mr. BERNANKE. Yes, sir.
Mr. PRICE. And is that opinion sharedthat desire to leave that
role, do you know if that is shared by the current Administration,
the Secretary of the Treasury?
Mr. BERNANKE. I think it is. We have discussed this in the past,
and I believe he has spoken about this in public as well.
Mr. PRICE. And when is it that we will know that you believe it
is time to leave that role? Will you announce it?
Mr. BERNANKE. No. It will be time when there is in place an appropriate legislative framework that allows for a more systematic,
prompt, corrective, action-type approach that will outline exactly
how the government wants these firms resolved.
Mr. PRICE. So regulatory reform will
Mr. BERNANKE. Regulatory reform is what we are waiting for.
Mr. PRICE. Another item that you said was one of your roles in
these challenges was to stimulate credit markets where they have
broken down. Other than the interest rate decrease, which is as
low as it can go now, and the injecting of capital, what else can be
done there?

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Mr. BERNANKE. Sir, as I have indicated, people sometimes argue
that once interest rates get to zero that the central bank cant do
anything else. Well, we have found some other ways to try to ease
financial conditions, and I have talked about three general areas:
One is lending to banks, financial institutions, increase their liquidity; the second is to buy securities, including mortgage-backed
securities, which lowers mortgage rates and strengthens that market; and then the third is to use various tools to try to address specific credit markets like the commercial paper market and the
asset-backed securities market.
I think we are going to have to explore what the alternatives are
and see which markets could use assistance and whether we have
tools available between us, the Treasury, and other agencies to address those problems, so I really cant tell you now. But our most
immediate plans, as discussed this morning, would be to expand
the TALF to include other types of asset-backed securities like commercial, mortgage-backed securities.
Mr. PRICE. In response to a couple of questions as to why credit
markets arent working now, you have said, I think on two separate occasions today, that initially institutions pull back because of
the degree of the calamity, and secondly, that currently the uncertainty in the economy precludes them from moving forward with
providing credit.
My sense isdo you have any sense about the role that the Federal Government has to play in that uncertainty?
Mr. BERNANKE. Well, certainly, if policy can be laid out in a comprehensive and predictable way, that is going to make it easier for
firms to understand their environment to make good decisions.
Again, the effort of the Treasury Department has been to try to lay
out major elements of a comprehensive plan.
Mr. PRICE. What about private capital? If I have private capital,
and I am sitting on the sidelines right now, agreeing with you that
there is a huge amount of uncertainty and therefore I ought not invest, for if I invest, I dont know whether my investment is going
to be diluted or whether the Federal Government is going to come
in and bail out my competition, isnt that a degree of uncertainty
that we ought to address?
Mr. BERNANKE. That is an element of uncertainty. But also
things like the amount of assets on the balance sheet which are
very hard to value is a very important source of uncertainty.
So I agree, you want to have comprehensive, predictable policies,
and you also want to address the underlying problem, which is the
losses and the bad assets.
Mr. PRICE. But from a private capital standpoint, is there any incentive right now for private capital to get back in?
Mr. BERNANKE. There are some cases, but very few.
Mr. PRICE. If we agree that markets ought to be allowed to work,
wouldnt it behoove us to put in place a system or to concentrate
on a solution that allows or incentivizes that private capital to get
back in?
Mr. BERNANKE. Absolutely. That should be a top priority.
Mr. PRICE. And as a top priority, if that private capital is sitting
on the sidelines because of governmental intervention, isnt it ap-

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propriate that we wind down the governmental intervention as rapidly as possible?
Mr. BERNANKE. As soon as possible. But I would not want to say
that the government intervention is the primary source of uncertainty.
Mr. PRICE. I didnt
Mr. BERNANKE. The primary source of uncertainty has been credit losses in the economy.
Mr. PRICE. In closing, in the few seconds I have left, you mentioned that the debt-to-GDP ratio has increased about 15 percentage points and that is, tolerable in a growing economy.
In a contracting economy, what level of ratio is tolerable?
Mr. BERNANKE. In a contracting economy, all else equal, the
debt-to-GDP ratio will just keep rising. The economy wont keep up
with it.
Mr. PRICE. Is that where we are?
Mr. WATT. The gentlemans time has expired.
Mr. BERNANKE. We are looking for long-term growth.
Mr. WATT. The gentleman from St. Louis.
Mr. CLAY. Thank you so much, Mr. Chairman.
And welcome back to the committee, Chairman Bernanke.
I, like most Americans, have serious concerns about the economy
and the remedies that are used to address the problems. Americans
are concerned that TARP provided money to financial institutions
to provide liquidity for lending, and after investing hundreds of billions of taxpayer dollars, we are still seeing a lack of liquidity.
Many smaller banks declared they needed no bailout as they had
good paper, yet many of them received tens of millions of dollars,
some in excess of $100 million, all unsolicited.
I wont name all of the concerns, but I find some of the distributions of funds questionable at best.
Mr. Bernanke, did you or are you aware of former Secretary
Paulsons forcing some banks to take TARP money?
Mr. BERNANKE. Well, there was some implicit pressure put on
the very largest banks, whose stability is viewed critical to the
economy, but I am not aware of any medium or small banks that
were forced in any way to take TARP money, no.
Mr. CLAY. And I guess it was either your opinion or Secretary
Paulsons opinion that the larger banks needed to take the money?
Mr. BERNANKE. I think that has been borne out. I think that has
clearly been the case that many of the largest banks were the ones
that have had the worst hits to capital and the biggest losses.
Mr. CLAY. And they still have not freed-up credit?
Mr. BERNANKE. Everything is relative, sir.
I mean, the first thing to do was to prevent collapse and meltdown, and that is somethingpeople dont realize how close we
came to that. It was a very, very serious risk.
We have also mitigated to some extent the contraction, the
deleveraging of credit. And I think the creditthe capital which
has already been deployed will be constructive and useful in the
next stage, proposed this morning by Secretary Geithner. In particular, he is proposing to have that first round of capital convertible into common equity at theif the bank and the supervisor de-

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cide it is appropriate, which may provide additional strength for
the banks.
Mr. CLAY. Help me with the process here.
Under Secretary Geithners plan, we will have private investors
and money handlers separating good assets from bad assets. Will
the assets be purchased by the taxpayers?
Mr. BERNANKE. There will beI need to leave the details to Secretary Geithner, but I think the general idea is that the private
sector and the public sector would share both in the cost and in the
return. Therefore, the private sector would have money on the line,
they would have skin in the game, and they would have a strong
incentive to make good decisions and make good prices.
Mr. CLAY. So does that say we will put money up front to purchase bad assets?
Mr. BERNANKE. No. I think the idea is that there will be a sharing, that there will be a combination of public and private money
and private purchases. But that isagain, the Secretary is going
to want to work out details with the Congress. I am not trying to
front-run him here.
Mr. CLAY. I see. Thank you for that.
And, Mr. Chairman, what is your opinion of the handling of the
first $350 billion of the TARP? In hindsight, what changes would
you have made in the distribution of the money, and what are your
recommendations for going forward with the second half of the
money?
Mr. BERNANKE. Well, I think the capital that was distributed
was very important, as I said. I said I think it avoided a global
meltdown and has benefits that will show up and be important in
the second stage.
I think the biggest mistake was that communication and explanation was not adequate, and we should have done a better job of
explaining to the Congress and to the people exactly what we were
trying to accomplishand this point was made earlierand how it
would be facilitated through the TARP.
Mr. CLAY. Thank you for your responses.
I yield back. Thank you.
Mr. WATT. The gentleman from New Jersey.
Mr. GARRETT. I thank the chairman. Before I begin, let me go to
the opening comment by the chairman about the need for andthe
greater transparency by your department and the efforts that you
made in that regard.
As other people have said, we received a number of questions
from our constituents, and I just remind you, though, that when we
get those questions, we forward them on to you. And in the case
of course, we did that last year after Bear Stearns; I think it was
around in April, and it took us around 2 months in order to get
a response. And we have sincewe finally did get a response. It
was December 4th of last year, after everything else has occurred;
and we are now 212 months just about down the road, and we are
still waiting for a response.
These are questions not just coming from myself. These are questions coming from our constituents, the American public. So when
we talk about the need for transparency, it is right there.

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And if you couldI appreciate the fact that you are able to turn
on a dime, if you will, when an emergency situation happens; and
it is often on a Sunday afternoon or a Sunday evening that you are
able to move like that, to not spend money but to lend money. And
we would ask that you would be able to turn on a dime a little bit
quicker to respond back to our constituents on these things.
Secondly, the chairman of the Capital Markets Committee, Mr.
Kanjorski, said he hears from his constituents as to what the plan
is. I think that question goes to the questions that we have heard
from the gentleman from Georgia as to what the plan is.
As we sit here todayand I know the Treasury Secretary is over
on the other side testifyingI think we are stillcapital markets
are still with that question mark out there, whats the plan? And
the gentleman from Georgia raises the point very well, that assets
will sit on the sidelines until they feel thatthe old saying goes,
Dont just do something, stand there, might be more appropriate
for a period of time so the markets could settle down.
Some of the questions we had isgoing to the situation with AIG
specifically, are you able to tell us who the specific counterparties
are that specifically benefited from the infusion of cash into AIG?
And secondly, are you able to tell us, in light of the fact that the
default credit swaps are basically moved off balance sheet at this
time, and we were told that that was really where the systemic
risk was and what made it so important, why are we so engaged
and involved and why do we still have the problem with AIG?
Mr. BERNANKE. On the former, that is on the list of things we
are reviewing to try to make sure that legal, privacy, and other
concerns are manageable in the context that you are asking for.
On why we are involved in AIG, partly it is that we have in some
sense reduced the risks associated with AIG by taking some of the
critical counterparty risk off the balance sheet, as you point out.
There still are important risks associated with the company that
have not yet been eliminated by any means
Mr. GARRETT. So these are other than the default credit swaps
and the
Mr. BERNANKE. other than those.
But beyond that, obviously we want the company to pay us back.
So we are watching it.
Mr. GARRETT. That cant be accomplished just by allowing the
company to
Mr. BERNANKE. Well, since we now havesince we are now the
principal creditor and the principal shareholder, we certainly have
some, I think, responsibility to make sure that the company is operating in ways that are consistent with the goal of paying the taxpayer or paying the Federal Reserve.
Mr. GARRETT. Well, do you have an obligation that the company
is sustaining itself or will actually stay as a company or actually
payitself, pay back the taxpayers, that that may be not in the
current format?
Mr. BERNANKE. We are open to different approaches and we are
in consultation with the management.
Our mainwe have two objectives. The first is to make sure that
the company doesnt fail and create systemic risk; and the second

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is to make sure that the U.S. Government is fully repaid for the
loans and capital that were injected into the company.
Mr. GARRETT. All right.
Also a question of mine is what the Fed does and what the
Treasury does. You had made reference here, and I know in the
past as far as the plans to spend $100 billion for GSEs direct obligations, and up to $500 billion in GSEs mortgage-backed securities.
And I understand what the goal is there, both that and also your
efforts with regard to the asset-backed securities issues.
In light of all the authority and the money that we have appropriated through the TARP program for Treasury, can you explain
to us why the Fed continues in this action and why both of these
areas are not relegated to the Treasury to handle? Dont they have
the authority and the money to do it?
Mr. BERNANKE. Yes, they do. I would add, though, that the Fed,
in making those purchases, is not using any extraordinary authority by any means, not 13(3) or anything else. It is part of our usual
open market operations to be able to transact an agencys securities, and we thought it would be constructive to add our purchasing
power to this effort to try to bring down mortgage rates and try to
strengthen the economy.
Mr. GARRETT. Well, you appreciate what Congress went through
to come up with the $700 billion to authorize for the TARP program. You are talking about $600 billion, obviously without any
discussion of Congress here.
So I understand you have the authority, but shouldnt it be that
Congress has already given you direction in those areas to take
that action?
Mr. WATT. The gentlemans time has expired.
Mr. BERNANKE. These are acquisitions of Fannie and Freddie securities, which is already basically in conservatorship under the
authority of the U.S. Government. We are not making additional
taking additional risks, for example.
Mr. WATT. The gentlemans time has expired.
Mr. Lynch is recognized.
Mr. LYNCH. Thank you, Mr. Chairman.
Thank you, Mr. Chairman, for your willingness to come forward
and help the committee with its work.
I understand it is widely known that you are an expert of some
sort on the Depression, the Crash of 1929. Hopefully, your education in that area wont become too relevant. But I have to say
that there is one response, I think, of Congress and of the capital
markets back in 1929 that I think we have ignored thus far.
In looking at what happened in 1929 and the years following
that, I was struck that it appears that Congress and Wall Street
got together in one regard and said that in order to try to stabilize
the markets and get them on firm footing, Wall Street agreed to
transaction fees.
What they came up with was a formula which was rather modest
in those days. I think the volume of trades on the major exchanges
were around 5 million shares a day, at its maximum on a good day
back in 1929; and they agreed that 1/300 of 1 percent of each share
traded on the major exchanges would go into a fund. And essentially it started off funding the SEC and some other things that

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were, I think, very helpful in the regulatory framework around the
markets at that time.
We have been giving out money left and right here, and there
has been no similar effort to ask Wall Street, the people who
some of whom caused this major problem, the people who are certainly benefiting from the first phase of TARP, the second phase
of TARP, a lot of the things that you have been doing.
And I dont discount that you have been on the mark a number
of times in terms of the relief you have provided, but isnt there a
placethis Congress is going to consider a regulatory reform regime in the coming months. Isnt there some place in all of this
rather than ask the American taxpayer to pick up every red cent
for generations for all the mistakes that have been made here, isnt
there a rightful place for transaction fees to say to Wall Street,
Look, this was part of the solution in 1929; this could be part of
the solution now?
There were only 5 million shares a day on the major exchanges
back in 1929 on a good day. We havent had a good day in a while;
on a good day these days, you have 5 billion shares a day. So it
could be a microscopic, a very small fee, that would at least tell the
American people that, Hey, for those of you that dont have money
on Wall Street, you can rest assured that the people who are trading there, the people who are doing business on Wall Street are
kicking in a little bit, finally.
Is there a role for transaction fees? Might we ask Wall Street to
help out?
Mr. BERNANKE. I understand your concern. I have a couple of
issues with the transaction fees. One is that the people who trade
sharesthe cost is actually passed on to the people who own the
shares, which is people with 401(k)s, and half the public own
shares.
Mr. LYNCH. I understand. But there are a lot of people in my district, probably 40 percent of them dont have any money at all,
andyou talk about unfairthey are being asked to pay for this.
And I think there is a way to structure these things that you make
sure it comes out of the firms, as well asopposed to justand,
you know, bond activity is not assessed at all; and we could look
at that. They havent been less than culpable in a lot of this crisis
as well.
But I am sorry. I didnt mean to interrupt your response.
Mr. BERNANKE. I was just going to make the comment that some
economists have suggested transaction fees as a way of reducing liquidity and speculation in stock markets. I would have to say at
the moment that liquidity is very short and that we are not seeing
much of a speculative bubble in shares.
I understandI understand your general sentiment that trying
to find ways to finance some of this cost in the longer term from
the financial industry, for example, is worth looking at. But I dont
think that isthat wouldnt be my first choice, and I am afraid in
the very short run that it doesnt make much sense to put in capital and then take it right back out for financing.
But certainly as we go forward, as I said to a number of people,
it is going to be very important to try to get back to fiscal sensi-

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bility and fiscal stability; and there are lots of ways to get there,
and Congress should look at a broad range of options.
Mr. WATT. The gentlemans time has expired.
The gentleman from Michigan.
Mr. MCCOTTER. Thank you, Mr. Chairman.
People in my district woke up one day sometime late last year
and found out that the world, as they knew it economically, was
going to end because someone had done something wrong to seize
up the credit markets. And since that time they have witnessed
disorder in the sense of the governments response.
They have perceived this to be an unjust appropriation of their
money, spent on the very people who caused the problem, and they
see a long-term loss of economic freedom due to government intervention. And most importantly, they dont see much benefit to their
daily lives from all the things that the government has done.
My concern in studying human nature is twofold: one, the concept of too big to fail. When you tell people they are too big to
fail, they will, because they know there is no responsibility to be
incurred, no accountability if they do.
Where is the stigma for the people who failed and put us in this
mess? Where are the measures taken to ensure that they pay a
price for their problems that they have put onto us? I dont see any.
I dont see any at this point.
And the second part of my question is kind of that these people
thought they could go on forever doing what they were doing, that
it would just keep going, that the dot-com bubble was replaced by
a housing bubble, and it would never end. Now we are talking
about creating a government bubble to fix the housing bubble, but
they never thought they were wrong.
I asked you and Mr. Paulson once, What happened? The answer was, Mistakes were made. Well, I understand human beings
are fallible. But the problem is, if people think they are too big to
fail or they are too important, the hubris that enters into the prognostications that they make and the actions that they take leads
them to make very, very big mistakes.
So my question is this: If these people were wrong and we are
suffering the consequences of their bad decisions; if people like Mr.
Greenspan, who has admitted he was wrong, have caused us to suffer the consequences of his bad decisions; ifas you have written
a book about the Great Depressionthe people at the Federal Reserve were wrong and the people at the time had to live with their
bad decisions, what in the odd chance happens if you are wrong?
What is your worst-case scenario for the decisions and the actions
that you have made and taken being incorrect, how will that affect
the people who sent me here to work for them?
Mr. BERNANKE. Let me just start first by saying something about
too big to fail; and I just want to reiterate this once again, that
the too big to fail problem is an unacceptable problem. It needs
to be addressed through tougher regulation, through resolution regimes, through other steps that will make fewer ifand ideally, no
firm is too big to fail. That is critically important; I support that
100 percent.
In terms of my own decisionmaking, I am doing the best I can
with limited information. This has been an extraordinary, unprece-

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dented event. Many things have happened that we thought couldnt
happen. It has been extraordinarily severe. We have not gotten a
complete grip on this thing yet. It has been 18 months already.
I believe that the policies that the Federal Reserve is taking and
the steps that the Treasury and others are proposing are the best
methods for addressing these issues; and it is based on, not pure
guesswork but on some knowledge of history and other countries
experience and so on.
But certainly it is possible that it wont be enough and that there
will be further problems down the road. There is no way I can
guarantee that, but certainly any policymaker, yourself included,
has to make the best decision given the information and experience
and knowledge that he or she has.
Mr. MCCOTTER. On that point, I appreciate that, but when you
make a decision, you also have to look at the potential ramifications of what will happen if you are wrong. Given the unprecedented actions of the Fed and the unprecedented amounts that are
being utilized, leaving aside the unprecedented amounts and actions that the Federal Government has taken to try to address this,
you have to know what happens if you are wrong, before you can
make a decision to proceed and do what you think is right.
So my question is, if you are wrong, what do you foresee as being
the consequences?
Mr. BERNANKE. Well, some have raised the concern about inflation. If we dont get the balance sheet under control and the money
supply under control in time, in an appropriate moment, we could
risk having higher prices down the road. That is certainly a possibility. It is one that we are very aware of and doing our best to
manage.
But, you know, nothing is certain. So that is one risk that I see.
The other risk I would point out would be just that the efforts
that are being made, including our attempts to stabilize key credit
markets, prove insufficient and the situation gets furtherdeteriorates further.
Those are the things I can foresee. There must be things I cant
foresee, but by definition, I dont know what they are.
Mr. WATT. The gentlemans time has expired.
The gentleman from North Carolina.
Mr. MILLER. Thank you, Mr. Chairman.
There are two versions of what the problem with the banks is,
mainly. One is a liquidity problemand you have spoken about a
liquidity problem several times in your testimonythat banks have
hard-to-value assets for which there is no active market, and they
have persnickety accounting rules.
The other is that there is an insolvency problem. The problem is
thatthe market is doing a pretty good job of valuing the assets.
That is what markets do best; that is their core competency. The
problem is, the assets arent really worth very much and that the
banks are really insolvent.
Without asking you which it is, which I think would take all of
my 5 minutes, do you agree that there are huge policy implications
that turns on whether we have, principleythat is l-ea solvency problem or a liquidity problem, that what we do to address
a solvency problem is not what we do to solve a liquidity problem?

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Mr. BERNANKE. I wouldI would make a choice there and say
that while liquidity is very important, particularly for short-term
stability, that what we have here is a question of uncertainty about
solvency; people dont know if the banks are solvent or not because
they cant really value the assets. And that is why I think that trying to take the assets off and value them at someat some market
clearing price is an important component of getting more clarity
into the market and potentially attracting capital back in from the
private sector.
Mr. MILLER. So you agree that if the result of an asset purchase
program that established an active market and had realistic values
might be that many banks would be revealed to be insolvent, that
actually would be a healthy development because it would increase
confidence in the financial system? It might attract private capital
because they know that the banksthat the books were honest?
Mr. BERNANKE. An interesting historical example is the bank
holiday of 1933, when Roosevelt shut down the banks for a week
and said, We are just going to check their books and open them
up only when we think they are solvent. And a lot of the banks
opened up pretty quick. So it is not really clear how much they
really looked through the books, but when they opened them up
again, people felt much more comfortable and more confident in the
banks.
And part of the proposal that Secretary Geithner put out this
morning is to have a supervisory review not only of the quality of
assets, the reserving and the potential future losses, but also to ask
a very important question: How well would the banks do in an
even more severe scenario?
Mr. MILLER. A stress test?
Mr. BERNANKE. A stress test.
Are they abledo they have enough capital that, even putting
aside whether they are solvent today, they could survive an even
worse scenario and get enough confidence that they could survive
that scenario. Putting enough capital in that they could survive
that scenario should help to restore confidence that they are, in
fact, solvent; and that would, in turn, attract private capital.
Mr. MILLER. Assuming there was confidence in the stress test
itself.
Mr. BERNANKE. Correct.
Mr. MILLER. Mr. Chairman, we have heard some pretty dire estimates of how much banks values areassets are overvalued. Goldman Sachs economists, just in the past couple of weeks, have said
that the total losses to American financial institutions is probably
about $2.1 trillion, and about $1 trillion of that had been realized
now, had been recognized on the books, and that meant there was
another $1.1 trillion of losses yet to be realized.
Not surprisingly, Nouriel Roubini, Dr. Doom, put the number
higher; he said $3.6 trillion, and about half of that banks and brokerage houses and that the total capitalization of the American
banking system is about $1.4 trillion which, he said, if his own
numbers were right, meant the entire American banking system
was insolvent.
The Federal Reserve is one of the principal safety and soundness
regulators. You have responsibility for safety and soundness regu-

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lation for most of the Nations banks one way or the other; and you
have been taking hundreds of billions of dollars of assets, trillions
of dollars of assets, as collateral for loans.
So I assume you have been giving some due diligence to what the
value of assets are. You have paid some attention. Do you have a
sense of whether American banks are overvaluing their assets and
by about how much, if they are?
Mr. BERNANKE. Well, it ishow much are the banks overvalued?
Mr. MILLER. How much have they overvalued their assets?
Mr. BERNANKE. Well, let me give you a number from the IMF.
They have raised their loss estimatesI will get this approximately right, and we will try to get you the exact numbers.
But they have raised their estimates for total losses to about $2.1
trillion, of which about half, I believeand again, if I am mistaken,
I will correct thisare in American institutions. I believe that they
estimate that about half of that has been taken, leaving something
like $500 billion or so more to take.
Banks, of course, earn income outside of their asset positions,
which will offset part of that. So their estimates would put the system as losing money stillhaving losses still to come; but I dont
think it would come very close at all to saying that the system was
insolvent. So I think it is safe to say that there is very wide disagreement about exactly what the amount of losses are; it depends
on your views.
Mr. WATT. The gentlemans time has expired.
The gentleman from Texas.
Mr. MARCHANT. Thank you, Mr. Chairman.
Mr. Chairman, in this announcement that was released today expanding the eligible collateral, do you feel like it also expands the
definition of those people who are able to come to the Fed to post
that collateral?
Mr. BERNANKE. Are you talking about the TALF program?
Mr. MARCHANT. Yes.
Mr. BERNANKE. Sir, the expansion of the assets that we take, it
would still work the same way, which is that investors would purchase these assets from the issuers of the ABS, and then we would
lend to theagainst that collateral we would lend to those investors in an amount between 85 and 95 percent of the principal
value, depending on the risk that we saw in those assets.
So the participants on the investors side may be very much the
same, potentially the same group of people, just general investors.
And on the issuers side, you have banks and other institutions
which create ABS. The difference would be the types of assets
which are being securitized, and that would affect different markets like the commercial mortgage market, for example.
Mr. MARCHANT. And one of the largest holders of commercialbacked mortgages are insurance companies. So are insurance companies eligible to come and participate in this TALF program?
Mr. BERNANKE. Yes, they are.
Mr. MARCHANT. And have they been participating to a high degree before
Mr. BERNANKE. We are not in operation yet. We are still a few
weeks away from operation.

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Mr. MARCHANT. But a new part of this will be that insurance
companies will be
Mr. BERNANKE. Any investor who wants to purchase ABS on a
leveraged basis could come to the Feds program and do that.
Mr. MARCHANT. And your goal has been, and you testified earlier
that about 5 percent of the overall loans are in these forms where
you consider there to be a higher risk, in the AIG loan or
Mr. BERNANKE. Of the Feds balance sheet, about 5 percent of
our loans are related to either AIG or Bear Stearns.
Mr. MARCHANT. And is that an internal target? Do you feel like
the expansion of the collateral and the expansion of the definition
of who can come and borrow from the Fed in any way endangers
that ratio that you are talking about?
Mr. BERNANKE. Well, we like that ratio to be as small as possible.
It got to where it was because of the actions we had to take to
preserve those firms. But we areif we expand the balance sheet
further, it is not in order to affect that ratio; it is in order to make
credit available for markets where currently the markets arent
working well.
Mr. MARCHANT. But you dont think that the expansion of this
will take that number down to where at some point 10 percent of
the loans would be over in that category?
Mr. BERNANKE. Well, it is 5 percent now, so it will only go down,
and we want to make it as low as possible.
Mr. MARCHANT. Do you feel likeearlier we talked about transparency, and you stated that there was some concern if you issued
aif you revealed those banks that came in on an overnight basis
that there would be some kind of reaction to thinking that because
they were coming in, they might not be a safe institution.
Are there some criteria for banks that are in every night with
the same assets and you are, in effect, rolling over every night the
same asset and the same loan? Is thatat what point is it not an
overnight loan, but it, in fact, is a longer-term commitment?
Mr. BERNANKE. Well, we always make sure of two things: first,
that the bank is sound, which means that we either have our own
supervisory staff there or we are in touch with the primary regulator of that bank; and the other thing is that we reevaluate the
collateral each time it comes in. If it declines in value, for example,
we would insist on a different piece of collateral.
But otherwise, certainly throughthere was a time when the
Fed would have said, No, stop. But, frankly, through this crisis, we
feel that we need to make liquidity available to banks, that they
can feel comfortable that if there is a drain on their deposits, for
example, that they will have access to the Feds window to make
up that liquidity.
Mr. MARCHANT. The last question is the AAA rating, and I think
that the public reached some conclusions about the validity of this
AAA rating.
Has the Fed come to where
Mr. WATT. The gentlemans time has expired.
Mr. MARCHANT. they feel like the AAA rating is a real AAA
rating now?

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Mr. WATT. The gentlemans time has expired. You will have to
answer in writing.
The gentleman from the other part of Texas.
Mr. GREEN. Thank you, Mr. Chairman.
And it is good to see you again, Mr. Bernanke. I do keep you in
my prayers.
Mr. BERNANKE. Thank you.
Mr. GREEN. Mr. Bernanke, I would like to discuss with you very
briefly the efficacy of mark-to-market and a possible modification.
My concern with mark-to-market is when we value assets and we
write them down as credit losses, which means that we assume
that they are losses because the borrower cannot perform or is not
performing, as opposed to liquidity losses, which assumes that performance does not necessitate a writing-down of the asset at the
current time.
My concern is this: If we buy these assets, we do have to assign
some value. If we utilize mark-to-market to assign the value, we
can create an even greater problem because there is no real market. We write down the assets.
When we write down the assets, we find ourselves having to introduce more capitalization. By introducing more capitalization, we
find ourselvesalso the banks have a liquidity problem in the
sense that they dont use that capitalization to lend money. They
use the money that they havethey are making on loans to lend
money, or they come to your discount window and they borrow to
lend money.
Now, having said all of thatand I hope it made sense to you
if it did make sense, would you kindly acknowledge so that I
know
Mr. BERNANKE. I thought it was a very good question. I appreciate it.
Mr. GREEN. Okay.
Having said all of that, one proposal is to split the assetswhat
are called troubled assets, toxic assets, bad loanssplit them
into credit losses and liquidity losses. In so doing, you dont take
all of what I will callin highly technical terminology, you dont
take all of the hit at one time; you kind of spread your losses over
some period of time because you only have to now deal immediately
with the bad credit as opposed to potentially bad credit.
Your thoughts on that type of modification, such that you dont
eliminate mark-to-market, but what you do is you modify it such
that it may be efficacious and not create a bigger problem?
Mr. BERNANKE. There is an idea very similar to that which
would have only the credit loss and not the liquidity loss going to
the income statement and showing up as profit and loss. And my
understanding is that FASB, the accounting board, and the SEC
reviewed that proposal late last year and found it sufficiently
promising that they were going to look at it again in 2009.
So I think it is an interesting idea and it is getting attention
from the accounting authorities. But it makesit makes sense to
try toparticularly for assets which are going to be held for a period, to make a distinction between the credit losses and the liquidity premium that you are referring to.
Mr. GREEN. Thank you.

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Now, a quick comment and a response from you. All banks are
not bad banks; and somehow all banks are getting the rap of being
bad banks because of what is happening, but they are not. Some
desire to lend, but they are not fully capitalized to the extent that
they would like to be, or if they are, they are having problems with
making loans because of, one, not getting good applicants, two, because they dont have the money to lend. While they received
money to capitalize, to be capitalizedthe money that we, for example, placed in banks; that money was to take an equity position,
and they used that money for capitalizationthey dont use that
money for lending.
So since they have that moneyand the public believes by the
way, Mr. Bernanke, and I am sure you are aware of this, that they
could have taken that money and immediately started to lend it,
which is a mistake; and somehow we have to communicate that
message that there are rules that require that they be fully capitalized or capitalized to the extent that they can make loans at a certain ratio.
So here is my concern: If we dont get this message outand I
think this is what one of the chairpersons has talked about earlier
in another way. But if we dont get this message out, the public
continues to believe that the banks are getting money, and they are
just holding on to it because they just like holding money, which
is highly unusual for banks. They kind of like to lend at a high rate
and borrow at a cheap rate, if they have to borrow, and prefer not
to borrow if they can help it.
So now would you kindly comment on how we can deal with this
perception that the public has about banks?
Mr. WATT. The gentleman may have to submit his comments in
writing.
Mr. BERNANKE. Can I take 30 seconds just to say I think it is
again a very good question; and that is one of the reasons it is hard
to judge whether a bank is increasing its lending as it should, or
not, because it may have funding issues. It may have difficulty
finding creditworthy borrowers. They may have other sources of
credit. It makes these kinds of measurements very difficult. But it
is a very good question.
Mr. WATT. The gentleman from the Vice Presidents State is recognized.
Mr. CASTLE. Thank you, Mr. Chairman.
Chairman Bernanke, first of all, I am delighted you are here. I
am delighted we are having this hearing. I had written to the
chairman of the committee some time ago asking for it, and I think
all of us looked forward to it, and I think it is very valuable.
You made a statement earlierand you have made it before, I
have seen it before at least; and that is that only half of loans at
normal times are from banks.
Can you briefly summarize where the otherwhat the percentages might be on the other half, where they might come from?
And let me tell you why I am asking the question. We are concerned about not just the liquidity and the capitalization, all of
which you are concerned about; it is part of your job. But we are
also concerned about what is happening in terms of lending prac-

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tices and the economy in general; and I am just concerned about
what the other lending outlets might be, if you know that.
Mr. BERNANKE. Yes, of course.
There are securities markets basically. You have corporate bonds
and other kinds of commercial debt like commercial paper. A very
important category is asset-backed securities where it could be that
the bank sort of ultimately makes the initial loan. It makes an
auto loan, for example. But rather than holding it on its books
against its own capital, it combines it with other auto loans, makes
a security called an asset-backed security, and sells it directly to
investors.
Another big area is mortgages, which are mostly securitized either from Fannie and Freddie or from private-label mortgage
securitizers.
So a verysomething on the order of half of all credit goes
through either the securitization market or through other securities markets; and although banks may be involved at some point
in the process, they do not hold thatthose assets on their portfolios, and their capital is not forced to bear that risk.
So the closing down of the securitization markets has put a lot
more pressure on the banks, because they havent got the capacity
to make up the difference between the losses in the securitization
markets.
Mr. CASTLE. Thank you.
What criteria are you looking at to determine the effectiveness
of the various programs, not only your regular lending to the
banks, but to the other institutions, the AIGs and Bear Stearnses?
I mean, do you look at just the capitalization and liquidity, or are
you looking at what they are doing with it and how they are conforming to their normal lending practices or whatever?
What criteria do you look at?
Mr. BERNANKE. Again, we are not involved in TARP-type activities to healthy banks. We were involved collaboratively with the
Treasury and the FDIC in trying to stabilize a small number of
large, systemically critical institutions; and there the major criterion is to prevent them from being involved in disorderly failure
and to allow them to be stabilized, and that was the main criterion
in those cases.
Mr. CASTLE. So as part of your criteria you are not really looking
at what they are doing, other than being stabilized and
Mr. BERNANKE. In order to decide if a company is systemically
critical, we need to look at their books and see what kinds of activities are they engaged in and, if they were to fail, what would be
the contagion effects across other institutions and other markets
around the world.
But that, again, as I have said several times, is 5 percent of our
activity, and 95 percent of our activity is trying to get markets
going again, like the commercial paper market where rates have
come down considerably or the mortgage market where rates have
come down.
Mr. CASTLE. Should section 13(3) of the Federal Reserve Act be
amended to ensure proper oversight of emergency activities to require congressional approval or Government Accountability Office
review, GAO review?

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Mr. BERNANKE. Well, there is substantial oversight, including a
monthly report on each activity to the Congress; and the GAO, of
course, can evaluate that. We have an IG as well.
But as I have mentioned, this is not a business we want to be
in. We want to get out of this business, and if Congress can develop
a good resolution regime to address this issue, the Federal Reserve
is happy to work with you in any way that can be constructive.
We would like towe would like to make stabilization of systemically critical firms a very rare event; and when it is done, it should
be done in as systematic and clear and as well specified a way as
possible.
Mr. CASTLE. Thank you.
I will yield back the balance of my time.
Mr. WATT. Mr. Cleaver is recognized.
Mr. CLEAVER. Thank you, Mr. Chairman.
Mr. Chairman, very quickly, before I get to my question, I think
we made a tactical mistake and I think we are making it again.
When you use the term bailout, I think thatand I know the
media connected with that and ran with it, and so you automatically are going to have a large number of people against a bailout
no matter what it is.
And then we started talking about the bad bank, and we are
setting ourselves up again. And I dont know who created the word
in this context, but whoever did it, it is not helpful. I mean, we
ought to use something like the Damascus Road Bank where
Paul was bad and had an experience, stayed in that experience 3
days, and came out good.
But whatever it is, you ought to get your linguists or somebody
we need tothis bad bank idea is bad.
Mr. BERNANKE. The official terminology is aggregator bank.
Mr. CLEAVER. It wont work, Mr. Chairman.
Mr. BERNANKE. That is not going to make it?
Mr. CLEAVER. It wont work. We need a 3-year-old to come up
with it.
I have two automobile manufacturing plants in my district, Ford
and GM. And the question that I am very much concerned about
is funding for the auto dealers floor plans. And in the TALF, there
does not appear to be funding except for securitized activities,
which is also troublesome becauseand Mr. Marchant, the gentleman from Texas, kind of went here, but, you know, why should
the securities be required to have a AAA rating when the agencies
that had all the toxic-backed mortgages also were AAA rated by
the rating agencies?
So I guess I have a couple of questions. One is auto dealer floor
plans. And then the second one is securitized activity.
Mr. BERNANKE. Just to interject, the floor plans are eligible for
the TALF under current rules.
As far as securitization is concerned, even if the underlying credit isnt perfect, the AAA tranche, the more senior tranche, would
still be eligible for financing through the TALF. We really
couldntjust procedurally and legally and operationally would
have a great deal of difficulty financing individual loans. It is much
more effective and efficient to have them in securitizations; and it
is common practice to securitize those loans, as I understand.

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Mr. CLEAVER. But the AAA rating, is that necessary?
Mr. BERNANKE. Well, I mean, a lot of people here today have
been concerned about the Federal Reserve taking on too much credit risk. So I want to respond to that concern about minimizing that
risk.
Again, it doesnt have to be athe underlying credit doesnt have
to be, necessarily, AAA so long as the ABS is structured in such
a way that the AAA component of it is financed.
Mr. CLEAVER. Let me change direction quickly. What if unemployment, God forbid, goes to 12 percent or higher? How are the
institutions going to pay back their loans to the Fed with unemployment soaring and the credit market frozen.
Mr. BERNANKE. Well, I certainly hope that doesnt happen, but
our collateral, our loans are very short term. Our collateral is continually reevaluated. So even if the economy gets very bad, banks
will almost certainly be able to make those short-term loan repayments. We are not concerned about that, we are concerned about
the effects of such a situation on the banking system as a whole.
Mr. CLEAVER. Thank you, Mr. Chairman.
Mr. WATT. The Chairman had advised us that he had to leave
at 4:00, so I want to inquire of his schedule.
Mr. BERNANKE. You have three more people; is that right?
Mr. WATT. Four more people; 1, 2, 3, 4.
Mr. BERNANKE. Certainly.
Mr. WATT. We have to go vote in 10 minutes anyway.
Mr. BERNANKE. All right. I will be glad to stay.
Mr. WATT. Mr. Royce.
Mr. ROYCE. Chairman, I served on the agency subcommittee, and
there is a history in terms of what happened in Japan that was interesting to me. Between 1992 and 1999, you had a series over 8
years of stimulus bills that were passed by the Japanese Legislature in an effort to get them out of recession, and during that period of time, it ended up being about $1.3 trillion U.S. that they
spent on this, but they ended up doubling their debt to GDP. It
went from something like 60 percent to 128 percent during that period of time.
And we had a meeting with Junichiro Koizumi, who was the
prime minister. He finally pushed through some reforms that did
two things. He basically privatized a lot of the parastatals. But the
other thing he did was he leaned on the banks and got them to
write off their toxic loans, their bad assets, and that, he always
felt, was what finally in 1999 brought them out, rather than the
spending stimuluses.
And in light of that, and also in light of what happened in Scandinavia, with the Swedish experiments in the 1990s, when they
had the subprime problem, and they developed a system where
they had the aggregator bank take those assets out of the system
so that their banking management were spending their time on
generating new loans instead of worrying about these assets that
were segregated; and then the assets, of course, were held, and it
was 5 or 6 years or whatever, and eventually the price came back
up and sort of netted outI guess it cost a couple of GDP points
to their economy, but they got through it without the type of crash
that they had feared.

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And so I was going to ask basically wasnt it the act of addressing the toxic assets that really worked for Japan and worked for
the Swedish government at the time? Getting those financial institutions to move those off of their books on to a different write-down
concept, isnt that what eventually probably had most to do with
those countries economic recovery?
Mr. BERNANKE. So specifically under fiscal policy in Japan, I
wont take you through it, but there is a lot of controversy. Some
say that it didnt work; others say it wasnt tried in a sufficiently
sustained way.
The lesson I do take, and exactly the one you just stated, is that
if we dont get the financial system working, and that involves very
likely both taking bad assets and injecting capital, that other steps
to restore the economy will probably not be effective.
Mr. ROYCE. I appreciate that.
I have a second question, and it has to do with a speech last
month by the president of the Richmond Federal Reserve Bank,
Jeff Lacker. He said, The critical policy question of our time is
where to establish the boundaries around the public-sector safety
net provided to financial market participants, now that the old
boundaries are gone. In doing so, the prime directive should be that
the extent of regulatory and supervisory oversight should match
the extent of access to central bank credit in order to contain moral
hazard effectively.
And he said, The dramatic recent expansion of Federal Reserve
lending, and government support more broadly, has extended public-sector support beyond existing supervisory reach, and thus could
destabilize the financial system if no corrective action is taken. Restoring consistency between the scope of government support and
the scope of government supervision is essential to a healthy and
sustainable financial system.
Is this a long-term question of moral hazard, how you offset it,
how you overcompensate for that? I talked to you about that before,
but I would just like your thoughts, if I could, on that.
Mr. BERNANKE. I think that is a critical principle for the longer
term, but we are in the middle right now of an extraordinary crisis.
Mr. ROYCE. I understand that.
Mr. BERNANKE. We need to get through that crisis, but I very
much agree with Mr. Lacker that we need to clarify regulatory responsibilities, and that lending and other such interventions ought
to be aligned with those authorities and with congressional intent.
Mr. ROYCE. I thank you very much. My time has expired.
Mr. WATT. Mr. Perlmutter.
Ms. Bean, I am sorry.
Ms. BEAN. Thank you, Mr. Chairman.
And thank you, Chairman Bernanke, for your patience with us
today. Your testimony has been helpful. Even when we are not
here, we are watching from our office. It has been very helpful.
In follow-up to Congressman Royces comments, given that you
are an expert in the history around the world in these types of situation, wasnt it also true, to go back to Japan, that part of the challenges they had were that they were slow in their response, and
it wasnt sizable enough in what they did; that they tightened their
monetary policy, where your approach has been just the opposite;

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and that much of their stimulus was very transportation- and infrastructure-specific, and it was not broad-based, as our own stimulus proposals are?
Mr. BERNANKE. Well, there are a lot of issues there. They did
have zero interest rates; in fact, they still have essentially zero interest rates.
I do think that speed of response is very important. As you have
all experienced firsthand politically, it is not easy to bring the public along to try to address problems in the banking system. And in
Japan the political resistance was one of the reasons why it took
a very long time to address the problem.
American people have complained a lot, and I dont blame them.
On the other hand, I think people understand that something
needs to be done, and these steps that are being taken, as distasteful as they are in some cases, are essential. And I think it speaks
well of the Congress that you did act to take these steps, and that
we are moving in a reasonably expeditious way, given the speed of
events and all that has happened, to begin to tackle our problems.
We are much better off addressing them quickly than letting them
fester.
Ms. BEAN. Thank you.
I have a few other questions. One is you have spoken before
about the use of tax dollars, both some that have involved congressional involvement with TARP, and some of the things you have
been able to do without our involvement to stabilize our system.
We have also spoken to the fact that the government has the
unique ability to hold certain assets that may presently be illiquid
and undervalued until a point when we might get a better return
on those dollars.
How much has that picture changed, in your mind, from when
you testified in the past about how much of that is likely to come
back? Are you feeling better, worse moving forward? Are you going
to have to hold onto certain things longer? What is your feeling?
Mr. BERNANKE. Well, I do think that there are big liquidity premiums and risk premiums in the market, and that eventually, in
all likelihood, those premiums will at least become more normal,
which wouldotherwise everything else being equal, would tend to
improve asset prices.
With that being said, I think one of the big issues right now is
that markets are very uncertain about where the economy is going.
They have a sense of what is likely to happen, but they fear a
small probability, a very bad outcome, and that makes them very
reluctant to take on risk.
To the extent the government has more capacity to bear risk and
more capacity to hold assets for a longer period, there is some benefit for the government to take assets via the asset purchase facility or some similar mechanism.
Ms. BEAN. You also, in response to a question from Congressman
Miller earlier, talked about Secretary Geithners proposal and how
he certainly wants to move what we are now calling legacy assets
instead of illiquid assets off the book of many of our financial institutions so that we can better also then evaluate how solvent many
of these institutions are.

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I just want to clarify whether I understood your comments in response to that; that you felt the good news about that is while
some institutions will be proven nonviable, and that there may be
some fallout, it should attract more capital than sitting on the sidelines waiting to have better confidence in reentering the market.
Mr. BERNANKE. Well, we hope that very few institutions will actually be insolvent, but the main issue here is not insolvency or solvency per se, but rather the uncertainty about whether institutions
are insolvent. And clarifying our policies and taking bad assets
through some mechanism would be one step towards making it
easier for investors to understand what it is they are buying if they
invest capital in an institution.
Ms. BEAN. My next question is had the Fed not actedand certainly you can act more quickly than when Congress is involved
where would we be now had you not gotten involved?
Mr. BERNANKE. I think we have worked on a number of different
fronts. I think we were very aggressive in cutting interest rates
and using expansionary monetary policy. I think that that has been
helpful. We have worked on a variety of markets, like the commercial paper market. We think we have seen some progress and stabilization, but obviously it has not been enough. I realize it is the
most controversial and difficult issue, but I do believe
Mr. WATT. The gentleladys time has expired.
Mr. BERNANKE. that if we had allowed some of the systemically
critical firms to fail, that that would have had very big ramifications.
Ms. BEAN. Thank you. I yield back.
Mr. WATT. Mr. Perlmutter, I am advised by Ms. Kilroy that she
has a 1-minute quick question. So if you will be so kind as to be
expeditious, but you are recognized.
Mr. PERLMUTTER. I will be very quick, Mr. Chairman.
Chairman Bernanke, it has been a heck of a roller coaster for the
last 18 months. I am just thinking about your testimony back last
July where you came in and gave the semiannual report, and there
has been a lot of ups and downs. I just want to thank you for your
service, sir.
Mr. BERNANKE. Thank you.
Mr. PERLMUTTER. It has been a difficult time for all of us, but
you have definitely been on the front line.
So here are my questions to you: We have been in triage, we
have been in the emergency room. We have systemic risk here and
systemic risk here, and automakers, Fannie Mae, banks, investment banks and insurance companies. Is there something wrong
with the systemnot all these little things; is there something
wrong with the system? And if you could go back in time, would
you change one thing; Glass-Steagall, branch banking, securitizing
loans? If you could go back in time, what would it be?
Mr. BERNANKE. I would greatly strengthen the public- and private-sector risk controls.
Mr. PERLMUTTER. Like what?
Mr. BERNANKE. Well, by strengthening supervisory oversight
over the risk management, making banks responsible for strengthening those controls. I think the system just got carried away by

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the credit bubble, and the risk management systems didnt succeed
in protecting the system from that.
There are also a lot of gaps in the regulatory system, places
where there is duplicate oversight, places where there is not
enough oversight. So we have a lot of work to do.
Mr. PERLMUTTER. I am putting it out there. You dont have to respond to it, but part of me longs for the good old days of smaller
banks or institutions, that in the event they were to fail, it doesnt
affect the system, which is what we have had here, and in too
many places and in too many spots, number one.
Second question, and then I will yield to the gentlewoman from
Ohio. Dr. Price kept talking about private capital on the sidelines.
I have heard that a lot, private capital on the sidelines. It will
come rushing in when we do something.
First of all, I want to compliment you; I think we staved off the
collapse of a banking system, given what was going on in September. But how much private capital is there to come roaring in
after the economy has dropped by 30 or 40 percent?
Mr. BERNANKE. I think there is a good bit. There has been a
huge rush away from credit markets in general, money going into
very safe assets, Treasury bill rates being driven even negative for
a short period, certainly less than it was before, and there have
been a lot of losses. But there is still plenty of capital if the environment improves in a way that makes it attractive.
Mr. PERLMUTTER. I have a million questions, but I yield to the
gentlelady from Ohio.
Mr. WATT. Ms. Kilroy.
Ms. KILROY. Thank you, Mr. Perlmutter.
Thank you, Chairman Bernanke, for accommodating us.
The questions and answers have certainly been instructive. And,
like Mr. Perlmutter, I would like to engage in a great deal more
on risk controls or robust resolution regime, transparency. But
right now the Dow is down over 400 points. What can you tell my
constituents in Ohio that will increase their confidence that their
401(k)s, that their childrens college funds, that their life savings
wont continue to suffer because of the uncertainty that you indicated was one of the problems andtheir concerns, the uncertainty
in the financial markets?
Mr. BERNANKE. Well, I wouldnt make any assessment of the
Treasurys proposal, for example, based on 1 days market reaction.
It is clearly very early. Secretary Geithner and the President and
the Federal Reserve and other authorities are going to work with
Congress and try to make sure that this thing is fleshed out in a
way that will meet all the concerns about transparency and efficiency and do the important work of stabilizing our financial system. There are many components to that.
I think that this plan touches on the many components: removing bad assets; injecting capital; doing something about the
securitization markets, which is, again, close to half of the credit
extent in the United States; foreclosure mitigation, which will soon
be described; increasing the guarantee of liabilities. All the key
steps that seem to make a whole are there, and details need to be
worked out, but I believe this is, broadly speaking, the right direction. And I know there will be a lot of work done over the coming

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weeks as the Treasury, the Administration, and the Congress work
together to try to figure out the appropriate details.
Ms. KILROY. Thank you, sir.
Mr. WATT. Let me express thanks for the Chair and the full committee for your appearance. I dont think anybody can go away saying you were not fully transparent in your testimony today. So we
thank you so much, and we will look forward to having you back
soon for the Humphrey-Hawkins hearing.
Mr. BERNANKE. Thank you.
Mr. WATT. The committee is adjourned.
[Whereupon, at 4:17 p.m., the hearing was adjourned.]

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February 10, 2009

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